`[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Rules and Regulations]
[Pages 106928-106960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30496]



[[Page 106927]]

Vol. 89

Monday,

No. 249

December 30, 2024

Part V





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Gross Proceeds Reporting by Brokers That Regularly Provide Services 
Effectuating Digital Asset Sales; Final Rule

  Federal Register / Vol. 89 , No. 249 / Monday, December 30, 2024 / 
Rules and Regulations  

[[Page 106928]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10021]
RIN 1545-BR39


Gross Proceeds Reporting by Brokers That Regularly Provide 
Services Effectuating Digital Asset Sales

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding information 
reporting by brokers that regularly provide services effectuating 
certain digital asset sales and exchanges. The final regulations 
require these brokers to file information returns and furnish payee 
statements reporting gross proceeds on dispositions of digital assets 
effected for customers in certain sale or exchange transactions.

DATES: 
    Effective date: These regulations are effective on February 28, 
2025.
    Applicability dates: For dates of applicability, see Sec.  1.6045-
1(q).

FOR FURTHER INFORMATION CONTACT: Roseann Cutrone or Jessica Chase of 
the Office of the Associate Chief Counsel (Procedure and 
Administration) at (202) 317-5436 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) by adding final regulations under section 6045 of the 
Internal Revenue Code (Code) to require certain decentralized finance 
industry participants to file and furnish information returns as 
brokers. Section 6045(a) provides an express delegation of authority to 
the Secretary of the Treasury or her delegate (Secretary) to require 
every person doing business as a broker to make returns, in accordance 
with such regulations as the Secretary may prescribe, showing the name 
and address of each customer, with such details regarding gross 
proceeds and such other information as the Secretary may by forms or 
regulations require. Section 80603 of the Infrastructure Investment and 
Jobs Act, Public Law 117-58, 135 Stat. 429, 1339 (2021) (Infrastructure 
Act) amended section 6045 clarify the definition of broker as it 
relates to persons responsible for regularly providing services 
effectuating transfers of digital assets, to expand the categories of 
assets for which basis reporting is required to include all digital 
assets, and to provide a definition for the term digital assets. 
Finally, the Infrastructure Act provided that these amendments apply to 
returns required to be filed, and statements required to be furnished, 
after December 31, 2023, and provided a rule of construction stating 
that these statutory amendments shall not be construed to create any 
inference for any period prior to the effective date of the amendments 
with respect to whether any person is a broker under section 6045(c)(1) 
or whether any digital asset is property which is a specified security 
under section 6045(g)(3)(B).
    The final regulations are also issued under the express delegation 
of authority under section 7805(a) of the Code. Section 7805(a) 
authorizes the Secretary to ``prescribe all needful rules and 
regulations for the enforcement of [the Code], including all rules and 
regulations as may be necessary by reason of any alteration of law in 
relation to internal revenue.'' The Infrastructure Act amended section 
6045, and the Secretary has determined that these final regulations are 
needful for the enforcement of the Code because tax compliance would be 
increased if brokers were required to file information returns, and 
furnish payee statements, under section 6045. See Proposed Rules, Gross 
Proceeds and Basis Reporting by Brokers and Determination of Amount 
Realized and Basis for Digital Asset Transactions, 88 FR 59576 (August 
29, 2023) (describing need for regulation and its anticipated impact on 
tax administration).

Background

    On August 29, 2023, the Treasury Department and the IRS published 
in the Federal Register (88 FR 59576) proposed regulations (REG-122793-
19) (proposed regulations) relating to information reporting under 
section 6045 by brokers. These proposed regulations included rules that 
would apply to brokers that generally act as agents and dealers in 
transactions with their customers involving digital assets, which are 
defined generally as any digital representation of value that is not 
cash and is recorded on a cryptographically secured distributed ledger 
(that is, a database that records transactions across multiple 
computers) or any similar technology. The proposed regulations also 
included rules that would apply to brokers that act as digital asset 
middlemen, a new category of broker proposed to address the use of 
digital assets to make certain payments and to reflect the clarified 
definition of broker under the Infrastructure Act. This proposed new 
category of broker would include certain participants that operate 
within the segment of the digital assets industry that is commonly 
referred to as decentralized finance (DeFi).\1\ The DeFi industry 
offers services that allow for transactions that use automatically 
executing software commonly referred to as smart contracts based on 
distributed ledger technology without any participant in the DeFi 
industry (DeFi participant) taking custody of the private keys used for 
accessing the digital asset customer's digital assets on a distributed 
ledger. Additionally, the proposed regulations included specific rules 
under section 1001 of the Code for determining the amount realized in a 
sale, exchange, or other disposition of digital assets and under 
section 1012 of the Code for calculating the basis of digital assets.
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    \1\ This preamble's use of the DeFi term is not intended to 
create any inference as to whether or not this segment of the 
digital assets industry operates without any centralized 
participants.
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    The proposed regulations stated that written or electronic comments 
provided in response to the proposed regulations must be received by 
October 30, 2023. The due date for comments was extended until November 
13, 2023. In response to the proposed regulations, the Treasury 
Department and the IRS received over 44,000 written comments.\2\ All 
posted comments were considered and are available at https://www.regulations.gov or upon request. A public hearing was held on 
November 13, 2023. In addition, the Treasury Department and the IRS 
continued to accept late comments through noon eastern time on April 5, 
2024.
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    \2\ Although https://www.regulations.gov indicated that over 
125,000 comments were received, the Treasury and the IRS did not 
actually receive over 125,000 comments. Instead, 125,000 reflects 
the number of ``submissions'' that each comment self-reported as 
being included in the comment, whether or not the comment actually 
included such separate submissions.
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    On July 9, 2024, the Treasury Department and the IRS published in 
the Federal Register (89 FR 56480) final regulations (REG-122793-19) 
(TD 10000) regarding information reporting by certain brokers and the 
determination of amount realized and basis for certain digital asset 
sales and exchanges. TD 10000 generally applies to digital asset 
brokers that act as agents for a party in the transaction, such as 
operators of custodial digital asset trading platforms, certain digital 
asset hosted wallet providers, and certain processors of digital asset 
payments (PDAPs), as well as persons that interact with their customers 
as counterparties to transactions, such as owners of digital asset 
kiosks, brokers who accept digital

[[Page 106929]]

assets as payment for commissions and certain other property, brokers 
that transact as dealers in digital assets, and certain issuers of 
digital assets who regularly offer to redeem those digital assets. 
Additionally, TD 10000 finalized specific rules under section 1001 for 
determining the amount realized in a sale, exchange, or other 
disposition of digital assets and under section 1012 for calculating 
the basis of digital assets.
    TD 10000 did not finalize the definition of digital asset middleman 
from the proposed regulations as applied to DeFi participants (referred 
to in the preamble to TD 10000 as non-custodial industry participants) 
because the Treasury Department and the IRS determined that additional 
consideration of the issues and comments received with respect to these 
participants was warranted. Instead, TD 10000 reserved on the proposed 
definition of digital asset middleman that would have treated these 
participants as brokers. The preamble to TD 10000 also indicated that 
the Treasury Department and the IRS intend to expeditiously issue 
separate final regulations with respect to these participants.
    The Summary of Comments and Explanation of Revisions of these final 
regulations summarizes the digital asset middleman provisions in the 
proposed regulations that were reserved in TD 10000, which provisions 
are explained in greater detail in the preamble to the proposed 
regulations. After considering the comments to these provisions, the 
reserved portion of the proposed regulations relating to the definition 
of a digital asset middleman is adopted as amended by this Treasury 
decision in response to such comments as described in the Summary of 
Comments and Explanation of Revisions.
    These final regulations concern Federal tax laws under the Internal 
Revenue Code only. No inference is intended with respect to any other 
legal regime, including the Federal securities laws and the Commodity 
Exchange Act, or the Bank Secrecy Act and its implementing regulations, 
which are outside the scope of these regulations.

Summary of Comments and Explanation of Revisions

I. Comparison of the Decentralized Digital Asset Ecosystem With the 
Securities Industry

    A few comments received in response to the proposed regulations 
asserted that the definition of broker in the final regulations should 
not extend beyond the scope of the definition of broker in the 
regulations that apply to securities industry participants in carrying 
out securities transactions. The Treasury Department and the IRS 
disagree with these comments and address them in Part II of this 
Summary of Comments and Explanation of Revisions. Before turning to 
that discussion, however, the Treasury Department and the IRS believe 
that a comparison of the functions carried out by brokers and other 
participants in the securities industry with the functions carried out 
by DeFi participants is useful in analyzing how the broker definition 
should apply to DeFi participants.
A. The Securities Industry
    In the securities industry, the sale of a security typically 
involves three fundamental functions, each of which is necessary for 
the trade to take place. First, a customer will give a trade order to 
sell its securities to a securities broker, specifying the details of 
the order, such as the quantity and identity of the securities to be 
sold. Second, the securities broker will route the order details to a 
trading center, such as a national securities exchange or an 
alternative trading center, for example in the case of U.S. equities 
the New York Stock Exchange (NYSE) or the Nasdaq Stock Market, to 
execute the order. Third, once the exchange or other trading center 
finds a counterparty to the customer's order, the matched trade will be 
sent to a clearing organization that will record and settle the 
transaction by moving the traded securities and funds between the 
accounts of the two brokers representing the matched customers. While 
other financial institutions may be involved in the sale transaction, 
and the functions involved may involve additional steps, these three 
functions are core functions.\3\
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    \3\ See DTCC, Accelerating the U.S. Securities Cycle to T+1, 
Figure 2: Illustrative T+1 settlement trade flow, at page 8 
(December 1, 2021), available at https://www.dtcc.com/-/media/Files/PDFs/T2/Accelerating-the-US-Securities-Settlement-Cycle-to-T1-December-1-2021.pdf; Financial Industry Regulatory Authority 
(FINRA), The LifeCycle of a Trade (November 21, 2017), available at 
https://www.finra.org/investors/insights/online-trade-lifecycle 
(describing the steps as the placement of an order by a customer and 
the receipt of the order by the broker, the sending of the order by 
a broker to an exchange or other trading center and the execution of 
the order on that exchange or other trading center, and the clearing 
and settling of the trade); Securities & Exchange Commission, Trade 
Execution: What Every Investor Should Know (January 15, 2013), 
available at https://www.sec.gov/about/reports-publications/investorpubstradexec.
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    The securities broker that receives the customer's order may offer 
additional services. For example, while retail customers many years ago 
held physical stock and bond certificates themselves or with third-
party custodians, today a securities broker or affiliate of that broker 
typically will hold a retail customer's securities as a custodian, 
although there are still limited circumstances under which an 
individual may hold physical securities certificates. For institutional 
customers, it is common for a financial institution other than the 
securities broker that receives the customer's trade order to hold the 
customer's securities. In some cases, for example in the case of an 
insurance company or pension plan, the customer's securities may be 
held by a bank that offers specialized custodial services. In other 
cases, for example in the case of a hedge fund, the customer's 
securities may be held by its primary securities broker, referred to as 
a prime broker, but the customer may give the order to a different 
broker, referred to as an executing broker, that offers lower fees or 
other terms preferred by the customer. If the securities broker taking 
the customer's order does not hold the customer's securities, the 
executing broker and the financial institution holding the customer's 
securities will communicate with each other to ensure that the trade is 
executed smoothly by the exchange or other trading center.
    The market that executes the transaction may be a national 
securities exchange, as described above. Alternatively, the trade may 
be executed on an alternative trading center or by a single-dealer 
platform or wholesale broker. The function of all these trading centers 
is to match a sale order with a buy order.\4\ Another possibility is 
that the securities broker may not go to an external trading center to 
execute the trade. Instead, if the securities broker is also a dealer 
in those securities, it may fill the order by acting as the 
counterparty to the customer's trade. Alternatively, the securities 
broker may match the sell order with a buy order from another customer.
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    \4\ See FINRA, Where Do Stocks Trade? (September 28, 2023), 
available at https://www.finra.org/investors/insights/where-do-stocks-trade.
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    The last step in the transaction is for the sale to be cleared and 
settled. Clearing and settlement of a sale of securities involves 
verifying that the terms of the buy and sell orders match and carrying 
out the movement of securities from the account of the seller's 
securities broker to the account of the buyer's securities broker 
(which credits those securities to the buyer) and the movement of cash 
in the reverse direction. This function is carried out by a specialized 
financial institution that may be referred to as a clearing 
organization.

[[Page 106930]]

    Historically, communications between securities brokers and their 
customers took place in person or by telephone. Customers now may 
communicate a trade order to a securities broker through a mobile 
device application (mobile device app) or a website accessible via a 
computer or mobile device. The mobile device app or website provides a 
user interface with visual elements that enable customers to see the 
services offered and buttons and fill-in screens to enable customers to 
communicate trading instructions to the broker through the mobile 
device app or website. For example, a customer may access a mobile 
device app or website offered by a securities broker to select among a 
number of possible transactions, make its selection via buttons and 
fill-in screens, and authorize the purchase or sale of securities by 
clicking a button. Doing so generates a trade order in the form of 
software code which is transmitted to the broker's systems and used to 
initiate the remaining steps in the transaction. Similarly, each of the 
other steps in the sale of a security typically now take place 
electronically, through specialized software.
B. The Decentralized Digital Asset Ecosystem
    DeFi service providers use distributed ledger technologies to offer 
investment and other financial services, similar to those provided in 
the securities industry by securities brokers and exchanges, that 
enable customers to carry out trades of digital assets using 
applications,\5\ sometimes referred to as DeFi applications or dApps, 
without relying on a traditional centralized financial intermediary. 
The services provided generally involve multiple DeFi participants 
performing various functions throughout the process in order to 
complete a customer's transaction, including: the intake of a 
customer's trade order details and communication of that order to the 
validation network for execution of the trade using the automatically 
executing contracts of the DeFi protocol and for recordation and 
settlement of the trade via a consensus mechanism. Because these steps 
do not require the involvement of a centralized financial intermediary 
(although some participants may in fact be structured as such), they 
rely on software programs. Additional services and/or service providers 
may also be involved in the transaction. For example, another type of 
DeFi application, commonly referred to as a DeFi aggregator, may 
communicate the customer's trade to the DeFi protocol with the most 
favorable trade execution terms.
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    \5\ In the context of the DeFi ecosystem, these final 
regulations use the term execute to refer to the activation of the 
automatically executing contracts of DeFi applications and not to 
the simultaneous activities of validators that initiate this 
activation.
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    Several comments received in response to the proposed regulations 
referenced or described a model, referred to by some in the DeFi 
industry as the DeFi technology stack model or the DeFi stack reference 
model, which describes the components and functions involved in the 
communication, execution, and settlement of a typical DeFi transaction. 
This DeFi technology stack model is also described in several scholarly 
papers.\6\ The DeFi technology stack model classifies the technologies 
involved in the communication, execution, and settlement of a typical 
DeFi transaction into different technology layers, with each layer 
representing the performance of a different function in carrying out 
the overall transaction. In its simplest form, the DeFi technology 
stack model describes three primary technology layers--the interface 
layer, the application layer, and the settlement layer--even though 
these layers can be further subdivided into sub-layers. See BIS Paper 
at 4 (describing the application layer as having three sublayers). 
Other scholars describe the DeFi technology stack model as having more 
than three primary technology layers without subdivision within each 
layer. See e.g., FRB Review at 155 (describing five primary layers). 
Regardless of the number of layers described by any given model, the 
functionality provided by each layer is generally needed to complete 
the communication, execution, and settlement of a digital asset 
transaction involving DeFi participants. See BIS Paper at 4. For 
simplicity's sake, this preamble describes the DeFi technology stack 
model with three primary layers because that model is sufficient for 
the purpose of analyzing the issues raised by the comments received in 
response to the proposed regulations.
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    \6\ See e.g., R. Auer, B. Haslhofer, S. Kitzler, P. Saggese, and 
F. Victor, The Technology of Decentralized Finance (DeFi), Bank for 
International Settlements (January 2023) (BIS Paper), at 3, 
available at: https://www.bis.org/publ/work1066.htm, and F. 
Sch[auml]r, Decentralized Finance: On Blockchain--and Smart 
Contract-Based Financial Markets, Federal Reserve Bank of St. Louis 
Review, at 153, 156 (2d Qtr. 2021) (FRB Review), available at: 
https://research.stlouisfed.org/publications/review/2021/02/05/decentralized-finance-on-blockchain-and-smart-contract-based-financial-markets.
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    In general terms, the three-layer DeFi technology stack model 
places the interface layer at the top of the DeFi technology stack 
model because this is the layer with which most users of digital assets 
interact. The interface layer is the layer that enables digital asset 
users to communicate with DeFi participants operating on the other 
layers for ultimate execution and settlement of the transaction. The 
interface layer does so by providing software (sometimes referred to as 
front-end services) that provides the digital asset user with tools--
including screens, buttons, forms, and other visual elements 
incorporated in websites, mobile device apps, and browser extensions--
that users can use to trade digital assets in their unhosted wallets 
\7\ using DeFi protocols or DeFi aggregators operating on the 
application layer. The application layer is the layer that executes the 
user's trade order as part of the validation process. It is comprised 
of DeFi protocols that consist of automatically executing software 
programs or smart contracts that, when called upon, perform a 
predetermined series of actions, for example exchanging digital asset A 
for digital asset B, when certain conditions are met. Finally, the 
settlement layer is generally responsible for recording financial 
transactions on the distributed ledger, including transactions 
conducted by users that trade digital assets using DeFi protocols. Each 
of these layers are described in more detail in Parts I.B.1., 2., and 
3. of this Summary of Comments and Explanation of Revisions.
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    \7\ References in this preamble to an owner holding digital 
assets generally or holding digital assets in a wallet are meant to 
refer to holding or controlling the keys to the digital assets and, 
thus, the ability to transfer those digital assets. See Sec.  
1.6045-1(a)(25)(iv).
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    While not included in the three-layer model described in the BIS 
Paper, an important component of a DeFi transaction is the use of an 
unhosted wallet by digital asset users. A wallet is a means of storing, 
electronically or otherwise, a user's private keys to digital assets 
(more technically, the private keys to distributed ledger digital asset 
addresses as defined in Sec.  1.6045-1(a)(20)) held by or for the user. 
Private keys are required to conduct transactions with the digital 
assets associated with those keys and are sometimes analogized to a 
password to a bank or investment account. In contrast to a hosted 
wallet, in which a custodial service electronically stores the private 
keys to digital assets held on behalf of digital asset users, an 
unhosted wallet is a non-custodial means of storing a user's private 
keys to digital assets held by or for the user. See Sec.  1.6045-
1(a)(25)(i) and (iii). A broadly

[[Page 106931]]

analogous fact pattern (disregarding the technological differences) in 
the securities industry would be the use of a home safe by an investor 
to store the investor's securities certificates, so that only the 
investor controls what happens with those certificates. Unhosted 
wallets also typically include software that enables digital asset 
users to use their private keys, generally by signing or authorizing a 
transaction. Unhosted wallets may also provide wallet users with other 
services, such as tools that enable users to interact with the DeFi 
marketplace.
1. The Interface Layer
    While DeFi protocols execute exchanges of digital assets, 
interacting directly with a DeFi protocol requires the ability to write 
software code that will communicate with other participants in the DeFi 
ecosystem. Although some digital asset users possess these technical 
skills, most retail digital asset users do not. Instead, most retail 
digital asset users use the services provided by other participants in 
the DeFi ecosystem that offer a more user-friendly way to specify the 
details of the transaction they wish to carry out and to communicate 
that order so that it can be carried out. These services are generally 
referred to as front-end services because they are provided at the 
front end of a transaction and are classified as the interface layer 
because they are the services that most users face.
    Providers of front-end services typically offer a suite of services 
that enable their customers to view the market conditions relating to a 
customer's proposed trade, to input their proposed trade, and then to 
initiate the additional steps necessary to trade their digital assets 
(trading front-end services). Providers of these trading front-end 
services are referred to here as trading front-end service providers. 
This suite of services may be offered as part of the enhanced services 
offered by an unhosted wallet or alternatively by a website or mobile 
app to which customers connect their unhosted wallets. In either case, 
this service is provided through software that assists customers in 
initiating digital asset transactions, such as an exchange of digital 
asset A for digital asset B using a DeFi protocol. For example, when 
digital asset user C seeks to trade digital assets in C's unhosted 
wallet using a DeFi protocol, C may use a mobile device app or a 
website accessible via computer or mobile device that is designed for 
that purpose. Embedded in that mobile device app or website is software 
that provides C with visual elements that enable C to see the services 
offered, such as screens to view the distributed ledger market and 
potential trade transactions and buttons for C to press to communicate 
C's desired transaction order.
    When customers use trading front-end services, they will typically 
be provided with an array of available digital asset trading pairs 
applicable to the digital assets they hold in their unhosted wallets. 
For example, a customer that wishes to exchange a digital asset will be 
shown a menu of the trading pairs available for exchange of the 
customer's digital asset for different digital assets as well as the 
current exchange rate for each potential trade. Some trading front-end 
services also offer customers the ability to choose the DeFi trading 
application that will execute their transaction. After a customer 
reviews the available trading pairs and decides on a potential 
transaction, the customer will input the necessary trade order 
information. Thereafter, the trading front-end service will typically 
ask the customer to confirm the specific trade order details. If the 
trade order details are confirmed by the customer, the trading front-
end service will convert that trade order information into software 
code in the form of a data object, referred to here as coded trade 
order instructions. The coded trade order instructions include all of 
the details of the transaction, including how many digital assets to 
remove from the customer's unhosted wallet, the fees (if any) payable 
to the trading front-end service provider, and whether these fees will 
be withheld from the amount of digital assets disposed or the digital 
assets received in the trade. The coded trade order instructions must 
specify the particular DeFi trading protocol that will execute the 
customer's trade. The coded trade order instructions also specify the 
type of digital assets the customer will receive at the completion of 
the transaction and may specify the digital asset address into which 
the received digital assets should be transferred. In advance of 
certain transactions requested by the customer, the provider of trading 
front-end services will also obtain the customer's permission for the 
particular DeFi protocol to move digital assets out of the customer's 
wallet in one or more transactions. Without this service, many 
customers' trades cannot be executed.
    After the coded trade order instructions are complete, the next 
step is for the customer to authorize or sign the transaction, for 
example by clicking a button in the customer's wallet. Once the 
customer authorizes the transaction in their wallet, the unhosted 
wallet then forwards the signed transaction to a communication node for 
broadcast to the distributed ledger network, where it will stay as a 
pending transaction until a validator chooses to include it in a block, 
and the block is added to the distributed ledger. As part of the 
validator's processing of a DeFi protocol transaction, the coded trade 
order instructions provided through the trading front-end services call 
the applicable DeFi protocol's automatically executing smart contracts, 
which execute the transaction by performing the operations it was coded 
to perform without human intervention. In less technical terms, once 
the customer authorizes the transaction, the coded trade order 
instructions determine the subsequent steps in the transaction as it is 
processed. In short, trading front-end services permit a customer to 
select, confirm, and communicate the details of a trade transaction 
that it wishes to carry out using a DeFi protocol so that the 
transaction can be executed and settled by other DeFi participants. 
Notwithstanding differences in the technology used and the details of 
the mechanisms by which a customer's order is carried out, these 
services are similar to those provided to a customer by a traditional 
securities broker that does not hold or custody a customer's assets.
    In some cases, a trading front-end service provider might take 
control of the customer's digital assets by routing the customer's 
digital assets to an address controlled by the trading front-end 
service provider, for example, where the trading front-end services 
include DeFi aggregator services.
    Unhosted wallet providers do not necessarily offer the trading 
front-end services described in the previous paragraphs. Unhosted 
wallet providers may offer only more limited, basic wallet services or 
they may offer both basic wallet services and trading front-end 
services. As discussed in Part III.A.2. of this Summary of Comments and 
Explanation of Revisions, a core function of an unhosted wallet is to 
store private keys to distributed ledger digital asset addresses, so 
that wallet users can securely hold their digital assets at those 
addresses. In addition, as part of the basic wallet services, unhosted 
wallet providers typically include software that enables their 
customers to use those private keys to sign or authorize a transaction, 
similar to inputting a password or passcode to authorize other types of 
online transactions. Many providers of unhosted wallets also provide 
basic wallet services that enable their customers to transfer digital 
assets from

[[Page 106932]]

one wallet to another wallet. A customer that wishes to use trading 
front-end services but whose unhosted wallet provider does not offer 
the desired services or does not offer them at a competitive price, can 
use the trading front-end services provided by a third-party website or 
a mobile device app by connecting their unhosted wallet to that third-
party website. To carry out any transaction that will be recorded on 
the distributed ledger, the unhosted wallet will broadcast the signed 
transaction to the distributed ledger network, often through the use of 
specialized communication nodes. The basic wallet services described in 
this paragraph can be distinguished from the enhanced wallet services 
in which the trading front-end services used to interact with a DeFi 
protocol (described in the previous paragraphs in this part) or a DeFi 
aggregator that communicates the customer's trade to the DeFi protocol 
with the most favorable trade execution terms are provided by the 
unhosted wallet.
2. The Application Layer
    The application layer is in the middle of the three-layer DeFi 
technology stack model. One of the core functions of the application 
layer is to provide DeFi protocols that users can interact with to 
trade digital assets. DeFi protocols provide a function that is 
analogous to the function provided by a stock exchange or other trading 
center for matching buy and sell orders in the securities industry, 
although there are technological differences as to how that function is 
carried out.
    A DeFi protocol is comprised of computer software that utilizes 
distributed ledger technology to provide digital asset exchange 
services through automatically executing software that performs a 
predetermined series of actions when certain conditions are met. BIS 
Paper at 2. One type of DeFi protocol is an automated market maker. BIS 
Paper at 4. Some DeFi protocols create an exchange marketplace by 
pooling digital assets provided by multiple digital asset users to 
create market liquidity. Id.
    As discussed in I.B. of this Summary of Comments and Explanation of 
Revisions, another type of DeFi application relevant to the purchase 
and sale of digital assets is a DeFi aggregator. DeFi aggregators 
interact with, and use the services of, other DeFi protocols. BIS Paper 
at 4. A DeFi aggregator communicates a user's trade order to a DeFi 
protocol that may offer the most favorable trade execution terms.
    Although DeFi applications can facilitate many types of activities, 
such as non-custodial staking and re-staking, this preamble focuses 
only on DeFi protocols and DeFi aggregators that enable digital asset 
users to exchange digital assets for different digital assets, referred 
to respectively as DeFi trading protocols and DeFi trading aggregators 
and collectively as DeFi trading applications.
    Many of the comments describe DeFi trading applications as having 
immutable software that cannot be changed. However, many of these DeFi 
trading applications can simply be replaced by other applications that 
have new or different features, thus allowing for software upgrades in 
practice. In other cases, a DeFi trading application may have an 
``administration key'' or similar tool that allows developers, 
founders, or other persons to modify the software, such as by changing 
or updating certain variables within the software. The details of the 
changes that can be made to the software, and who can make them, 
however, are different with each DeFi trading application.
3. The Settlement Layer
    The settlement layer is at the bottom of the three-layer DeFi 
technology stack model. The settlement layer is generally responsible 
for completing financial transactions and discharging the obligations 
of all involved parties. BIS Paper at 4. Settlement involves recording 
financial transactions on the distributed ledger. This function is 
comparable to the clearing and settling of securities transactions, 
some of which are now being settled through distributed ledger 
technology. Settlement of a digital asset transaction is achieved by 
validators including the transaction in a block and adding that block 
to the blockchain through a consensus mechanism that resolves potential 
conflicts using consensus standards developed by the distributed ledger 
network. Id. In addition to validators, there are other DeFi 
participants, such as block builders, that may participate in this 
process. Once recorded, transactions are generally immutable, meaning 
they cannot be reversed. The recording of a transaction on the 
settlement layer generally effects a ``state change'' in a distributed 
ledger.

II. Statutory Authority To Treat DeFi Participants as Brokers

A. Background
    Before the amendments made to the Infrastructure Act, the 
definition of broker in section 6045(c)(1) included a dealer, a barter 
exchange, and a person who (for consideration) regularly acts as a 
middleman with respect to property or services. See section 
6045(c)(1)(A), (B), and (C). The Infrastructure Act, in section 
6045(c)(1)(D), added a new clause to the definition of broker: any 
person who (for consideration) is responsible for regularly providing 
any service effectuating transfers of digital assets on behalf of 
another person.
    Section 1.6045-1(a)(1) \8\ defines brokers that are required to 
report under section 6045. Under this section, ``any person . . . that, 
in the ordinary course of a trade or business during the calendar year, 
stands ready to effect sales to be made by others'' is a broker 
obligated to file information returns under section 6045. Section 
1.6045-1(a)(10) of the pre-TD 10000 regulations defined effect for this 
purpose to mean either to act as a principal with respect to a sale 
(for example, a dealer in securities who buys a security from one 
customer and then sells that security to another customer) or to act as 
an agent with respect to a sale if the nature of the agency is such 
that the agent ordinarily would know the gross proceeds of the sale. 
Because the regulatory definition of the term broker includes a 
reference to effecting sales, the definition of the term effect affects 
the types of persons who are treated as brokers. In addition, Sec.  
1.6045-1(a)(4) further defines a barter exchange that is a broker under 
section 6045(c)(1)(B) as any person with members or clients that 
contract either with each other or with such person to trade or barter 
property or services either directly or through such person.
---------------------------------------------------------------------------

    \8\ Unless otherwise qualified, regulation section references 
refer to the final regulations in effect before the effective date 
of these final regulations. The final regulations in effect before 
the effective date of TD 10000 will collectively be referred to as 
the pre-TD 10000 regulations.
---------------------------------------------------------------------------

    In Sec.  1.6045-1(a)(10)(i)(D), TD 10000 added to the definition of 
effect: to act as a digital asset middleman for a party in a sale of 
digital assets. Section 1.6045-1(a)(21)(i) defined a digital asset 
middleman for this purpose as any person who, with respect to a sale of 
digital assets, provides a facilitative service. Section 1.6045-
1(a)(21)(iii)(B)(1) through (4) defined a facilitative service by 
referencing five specific services in which the broker acts either as 
an agent or a counterparty in a digital asset sale.
    Proposed Sec.  1.6045-1(a)(21)(iii)(A) would have also included in 
the facilitative services definition any service that directly or 
indirectly effectuates a sale of digital assets, such as providing a 
party in the sale with access to an automatically executing contract or 
protocol, providing access to digital asset trading platforms, 
providing an automated market maker

[[Page 106933]]

system, providing order matching services, providing market making 
functions, providing services to discover the most competitive buy and 
sell prices, or providing escrow or escrow-like services to ensure both 
parties to an exchange act in accordance with their obligations. To be 
covered by this proposed rule, under proposed Sec.  1.6045-1(a)(21)(i), 
the person providing facilitative services would have to ordinarily 
know or be in a position to know the identity of the party making the 
sale and the nature of the transaction. Proposed Sec.  1.6045-
1(a)(21)(iii)(A) would have excepted from the definition of 
facilitative services certain validation services if conducted by a 
person engaged in the business of providing distributed ledger 
validation services and certain sales of hardware or licenses of 
software by persons engaged in the business of selling hardware or 
licensing software, for which the sole function is to permit persons to 
control private keys which are used for accessing digital assets on a 
distributed ledger. TD 10000 reserved on both the facilitative service 
definition under proposed Sec.  1.6045-1(a)(21)(iii)(A) and the 
definition of the ordinarily would know or position to know standard 
(together referred to herein as the position to know standard) under 
proposed Sec.  1.6045-1(a)(21)(ii). The proposed text for these 
provisions is discussed more fully in Parts III.A.2., III.A.3., and 
III.A.4. of this Summary of Comments and Explanation of Revisions.
B. Comments Received
1. The Statutory Language
    The Treasury Department and the IRS received numerous comments 
directed at the facilitative services definition under the proposed new 
digital asset middleman rules. As a threshold matter, several comments 
argued that this definition is inconsistent with the plain meaning of 
the broker definition under section 6045(c)(1)(D). Other comments 
asserted that the broker definition under section 6045(c)(1)(D) is 
limited to persons acting as agents in digital asset transactions. One 
comment cited Merriam-Webster Dictionary's definition of broker, as 
``someone who acts as an intermediary: such as . . . an agent who 
negotiates contracts of purchase and sale . . . [or] an agent who 
arranges marriages,'' \9\ as support for this assertion. Other comments 
reasoned that the term effectuate was meant to be synonymous with the 
term ``effect'' in Sec.  1.6045-1(a)(10) of the pre-TD 10000 
regulations, which, the comment stated, for over 35 years has required 
the broker to act as an agent (or principal) in the transaction. See TD 
7873, 48 FR 10302 (March 11, 1983). Another comment also focused on the 
definition of ``customers'' in the pre-TD 10000 regulations to 
similarly argue that section 6045(c)(1)(D) should not expand the scope 
of the broker definition beyond persons acting as agents or principals 
in a transaction. Specifically, the term customer is defined in Sec.  
1.6045-1(a)(2) to mean the person that makes the sale if the broker 
acts as an agent for such person in the sale, as a principal in the 
sale, or as a participant in the sale responsible for paying to such 
person or crediting to such person's account the gross proceeds on the 
sale. Because the definition of customer under the pre-TD 10000 
regulations requires that the broker-customer relationship be an 
agency, principal, or payor relationship, this comment argued that 
section 6045(c)(1)(D) should similarly be limited to persons acting as 
agents or principals in the sale.
---------------------------------------------------------------------------

    \9\ Merriam-Webster Dictionary, ``broker,'' accessed October 25, 
2023, https://www.merriam-webster.com/dictionary/broker.
---------------------------------------------------------------------------

    As discussed in Parts II.B.1.a. and II.B.1.b. of this Summary of 
Comments and Explanation of Revisions, the Treasury Department and the 
IRS do not agree that the statutory language defining broker under 
section 6045(c)(1)(D) is limited only to persons that act as the 
customer's agent (or as a principal/dealer) in a digital asset 
transaction.
a. The Definition of Broker Prior to the Infrastructure Act
    For over 35 years, the Code has set forth a broad definition of 
broker under section 6045(c)(1). Under this definition, the term broker 
is not limited to conventional securities brokers. Rather, the 
statutory language defines the term broker to include several other 
types of market participants. First, section 6045(c)(1)(A) treats a 
dealer as a broker. Dealers typically hold inventory and act as 
principals in sale transactions. George R. Kemon v. Commissioner, 16 
T.C. 1026 (1951).
    Second, under section 6045(c)(1)(B), the term broker includes a 
barter exchange, which is defined in section 6045(c)(3) to mean any 
organization of members providing property or services who jointly 
contract to trade or barter such property or services. Long-standing 
regulations define a barter exchange to mean any person with members or 
clients that contract either with each other or with such person to 
trade or barter property or services either directly or through such 
person. See Sec.  1.6045-1(a)(4). The regulations require these barter 
exchanges to report an exchange of property or services if the barter 
exchange arranges a direct exchange of property or services among its 
members or clients. See Sec.  1.6045-1(e)(2). That is, a barter 
exchange is treated as a broker if it merely provides the service of 
bringing together the parties to the exchange, without acting as either 
an agent or a principal to the exchange.
    Third, under section 6045(c)(1)(C), the statutory broker definition 
includes certain middlemen with respect to property or services. 
Because the statutory language must be given meaning, the term 
middleman must include persons who would not otherwise be considered 
brokers under the definition without section 6045(c)(1)(C). Pursuant to 
this authority, the section 6045 regulations treat certain payors and 
agents as brokers, including professional custodians as well as 
dividend reinvestment agents that do not take custody of customer 
securities. See Sec.  1.6045-1(b)(1)(ii) and (v) (Example 1). 
Additionally, the flush language in section 6045(c) expressly exempts a 
person that manages a farm on behalf of another person from the 
definition of broker with respect to their farm management activities. 
See H.R. Rep. No. 100-795, at 360 (1988) (the bill exempts farm 
managers from the requirement of filing a Form 1099-B with respect to 
their farm management activities because this information must already 
be filed, in a more useful format, by these farm managers on a Schedule 
F, thus, making the Form 1099-B duplicative). This farm-manager 
exemption shows that Congress broadly construed the term middleman 
beyond conventional securities brokers. In addition, Sec.  1.6045-
1(b)(2)(ii) and (vii) (Example 2) provide specific exclusions for stock 
exchanges and clearing organizations, which, absent those exclusions, 
would be middlemen treated as brokers. Indeed, virtually all other 
persons that Sec.  1.6045-1(b)(2) (Example 2) illustrates as non-
brokers, including certain stock transfer agents for a corporation, 
certain escrow agents or nominees, and certain floor brokers on a 
commodities exchange, are examples of persons that could be considered 
middlemen.
    Thus, prior to the Infrastructure Act, the term broker under 
section 6045(c)(1) included specified types of principals, custodial 
agents, non-custodial agents, payors, and service providers, pursuant 
to the statute and long-standing implementing regulations. See e.g., 
Sec.  1.6045-1(c)(3)(iv) and (c)(4)(iii), (iv), and (v) (Examples 3, 4, 
and 5) (multiple

[[Page 106934]]

broker examples involving one broker that holds the customer's assets 
and another broker that does not hold the customer's assets). The term 
broker was not defined by reference to any particular type of property 
or services. Accordingly, statutory authority existed before the 
enactment of the Infrastructure Act to treat centralized digital asset 
exchanges that act as traditional brokers or dealers as brokers for 
purposes of section 6045(c)(1).
    In addition, section 6045(c)(1) also provided statutory authority 
to treat as a broker any other person that satisfied the definition of 
broker, dealer, or a middleman with respect to property or services if 
the middleman regularly acted as such for consideration. See Part 
II.B.2. of this Summary of Comments and Explanation of Revisions, for a 
discussion of the scope of this authority with respect to DeFi 
participants.
b. The Definition of Broker Under Section 6045(c)(1)(D) as Enacted by 
the Infrastructure Act
    Section 6045(c)(1)(D) treats as a broker any person who (for 
consideration) is responsible for regularly providing any service 
effectuating transfers of digital assets on behalf of another person. 
This statutory language explicitly addresses certain types of 
activities not previously addressed expressly by section 6045(c)(1) 
that are relevant to determining broker status. Section 6045(c)(1)(D) 
refers to persons who provide specified types of digital asset 
services, when regularly provided for consideration on behalf of 
another person. The relevant services are those that effectuate 
transfers of digital assets. The statutory language treats the person 
providing those services as a broker.
    Statutory language must be construed to avoid rendering it as 
surplusage. See TRW, Inc. v. Andrews, 534 U.S. 19, 31 (2001) (noting 
the ``cardinal principle'' of statutory interpretation requires that 
``if it can be prevented, no clause, sentence, or word shall be 
superfluous, void, or insignificant.''). Accordingly, the Treasury 
Department and the IRS understand the statutory language to define the 
term broker in a manner that does not merely restate what was the law 
prior to the Infrastructure Act.
    One comment asserted that the text in section 6045(c)(1)(D) merely 
expands the broker definition with respect to the new types of assets 
(digital assets) that must be reported and clarifies that the persons 
reporting these new types of digital asset transactions must be 
conducting otherwise similar activities to brokers included in the 
existing definition of broker. The Treasury Department and the IRS do 
not agree that section 6045(c)(1)(D) applies only to digital asset 
brokers that fall within the broker definition under section 6045(c)(1) 
prior to the Infrastructure Act amendments. As described in Part 
II.B.1.a. of this Summary of Comments and Explanation of Revisions, 
section 6045(c)(1) already provided authority to address at least some 
digital asset brokers prior to the Infrastructure Act amendments. 
Section 6045(c)(1)(D) was added to the Code because Congress recognized 
that, in certain respects, the digital asset industry works differently 
from the securities industry and that explicit statutory language 
providing that certain additional digital asset service providers 
should be treated as brokers was essential to providing clarity on how 
information reporting rules apply to transactions involving digital 
assets. Nothing in the text of section 6045(c)(1)(D) limits the scope 
of digital asset brokers to those that fall within the broker 
definition under section 6045(c)(1) prior to the Infrastructure Act. 
Additionally, section 6045(c)(1)(D) does not limit the scope of digital 
asset brokers to persons who act as agents, because by its terms the 
statutory language refers to service providers. A person providing 
services to a customer may or may not be acting as an agent for the 
customer. Many service providers are not agents for their customers. 
Section 6045(c)(1)(D) refers to persons providing services and, 
therefore, is not limited to persons providing services only as agents. 
Moreover, because persons acting as agents are already included in the 
broker definition under section 6045(c)(1)(C), limiting section 
6045(c)(1)(D) to persons providing services as agents for digital asset 
transactions would render its text entirely superfluous.
    Section 6045(c)(1)(D) also is not limited to persons who effectuate 
transfers of digital assets. Section 6045(c)(1)(D) applies to any 
person who provides ``any service effectuating transfers,'' not ``any 
person who effectuates transfers.'' That is, the statutory language in 
section 6045(c)(1)(D) applies to persons who provide services to 
others, which services effectuate digital asset transfers. Given this 
textual distinction, the Treasury Department and the IRS have 
determined that section 6045(c)(1)(D) properly applies to persons that 
supply customers with services that are used by those customers to 
carry out digital asset transactions. As described in Part I.B.1. of 
this Summary of Comments and Explanation of Revisions, that is exactly 
the function provided by trading front-end service providers. For the 
reasons described in that part, most digital asset users could not 
easily carry out a DeFi sale or exchange of digital assets without the 
services of a trading front-end service provider. Although trading 
front-end service providers may not act as agents for their customers 
in these transactions, the services provided by these trading front-end 
service providers with respect to digital assets enable their customers 
to trade their digital assets through other DeFi participants, just as 
the services provided by securities brokers enable their customers to 
trade their securities through other securities market participants. 
That is, both trading front-end service providers and securities 
brokers make it possible for a customer to review a range of options 
for possible transactions, to make a selection and confirm that 
selection, and to communicate the details of the transaction that the 
customer wishes to carry out so that the transaction can be executed 
and settled by other market participants. Similarly, in both cases, the 
means by which those services are provided may include a website or 
mobile device app that provides a series of visual elements, such as 
forms, buttons that initiate actions, and dynamic page updates, that 
enable customers to view the market conditions relating to their 
proposed trades and to interact with that market by inputting their 
trade orders.
    Several comments argued that merely providing customers with 
software that the customer can use to engage in digital asset 
transactions does not constitute a ``service effectuating transfers.'' 
The Treasury Department and the IRS do not agree that the definition of 
broker should turn on the technological implementation of the services 
provided because the statute makes no reference to a particular form of 
technology. Instead, the definition should turn on what those services 
do. For example, the fact that, currently, a securities broker or 
dealer takes customer orders or routes these orders electronically does 
not change the nature of the services that the securities broker or 
dealer provides. The provision of a suite of software that enables a 
customer to interact with a distributed ledger network and effectuate 
transactions using DeFi trading applications is an example of providing 
a service that effectuates transfers.
    Numerous comments argued that the term effectuate in section 
6045(c)(1)(D) prevents the application of the broker definition to DeFi 
participants because these participants do not control the

[[Page 106935]]

private keys to the customer's digital assets being traded. As support 
for this argument, one comment cited a dictionary's definition of 
effectuate as ``to cause or bring about (something)'' and a Supreme 
Court interpretation of the meaning of ``effect'' as requiring a 
``reasonably close causal relationship between a change in the physical 
environment and the effect.'' See Effectuate, Merriam-Webster Online, 
https://www.merriam-webster.com/dictionary/effectuate; Metro. Edison 
Co. v. People Against Nuclear Energy, 460 U.S. 766, 774 (1984). This 
comment also compared transactions in which DeFi participants do not 
control the private keys to the customer's digital assets with those 
carried out by traditional securities brokers in which the brokers hold 
custody of the customer's securities and then asserted that the 
definition of effectuate cannot apply to the services provided by DeFi 
participants. Other comments argued that the word effectuate was meant 
to apply only to the one person who carries out the transaction. These 
comments concluded that expansion of the reporting regime under section 
6045 to persons that do not possess traditional characteristics of a 
broker in carrying out transactions exceeds the scope of the statute.
    The Treasury Department and the IRS do not agree that the actions 
of only one person, whether within the traditional securities industry 
or within the DeFi industry, causes a transaction to be carried out (or 
effectuated), which is why the pre-TD 10000 regulations contain a 
multiple broker rule. The Treasury Department and the IRS do agree, 
however, that a comparison of the persons involved in the steps 
necessary to carry out a securities transaction with the services 
involved in the steps necessary to carry out a DeFi transaction is 
helpful to understanding what it means to effect or effectuate a 
transaction. For purposes of this analysis as well as throughout these 
final regulations, the term person has the meaning provided by section 
7701(a)(1) of the Code, which provides that the term generally includes 
an individual, a legal entity, and an unincorporated group or 
organization through which any business, financial operation or venture 
is carried on, such as a partnership. The term person includes a 
business entity that is treated as an association or a partnership for 
Federal tax purposes under Sec.  301.7701-3(b). Accordingly, a group of 
persons providing services that together carry out a customer's digital 
asset transaction may be treated as a broker whether or not the group 
operates through a legal entity if the group is treated as a 
partnership or other person for U.S. Federal income tax purposes.
    As discussed in Part I.A. of this Summary of Comments and 
Explanation of Revisions, in the securities industry, the steps of a 
transaction typically begin when an investor communicates a trade order 
to a securities broker, who may or may not have custody of the 
investor's securities, and authorizes the securities broker to carry 
out the trade. The securities broker generally will assess how to 
obtain the best execution for the customer. That assessment could lead 
the broker to fill the order from its own account or match the trade 
with an offsetting trade order from another customer. The broker could 
also decide to route the investor's order to a trading center, such as 
a national securities exchange, an alternative trading system, or a 
dealer. The exchange or other trading center generally will attempt to 
find a counterparty to the investor's order. If the order is executed, 
transaction information typically will be sent to a clearing 
organization that will move the funds and securities between the 
appropriate accounts at the clearing organization to settle the 
transaction. The regulations under section 6045 treat only one of these 
securities industry participants as the broker with reporting 
obligations. See Sec.  1.6045-1(b)(2)(ii) and (vii) (Example 2) (not 
treating certain stock exchanges and clearing organization as brokers). 
Notwithstanding this rule, each of these participants technically meets 
the definition of a person who effects (or ``act[s] as . . . an agent 
for a party [albeit not the customer] in the sale'' if it ordinarily 
would know from its services the gross proceeds from the sale). See 
Sec.  1.6045-1(a)(10)(i)(A). Accordingly, it is the actions of all 
these securities industry participants--along with those of the 
customer--that collectively cause the transaction to be carried out.
    Similarly, as discussed in Parts I.B. and I.B.1. through I.B.3. of 
this Summary of Comments and Explanation of Revisions, the DeFi 
technology stack model shows that, in addition to the customer, there 
are multiple DeFi participants involved in causing a digital asset 
transaction to be carried out. In the DeFi industry, when a customer 
inputs a trade order on a mobile device app or a website accessible via 
computer or mobile device, a trading front-end service provider 
receives that trade order and has the customer confirm the trade order 
details. Once the trade order details are confirmed by the customer on 
the customer's computer or mobile device, the trading front-end 
services translate those details into coded trade order instructions 
which are sent to the customer's unhosted wallet to obtain the 
customer's signature or authorization. Thereafter, the wallet transmits 
the coded trade order instructions to the distributed ledger network 
for the eventual interaction with the applicable DeFi trading 
application for matching and for settlement pursuant to the services of 
DeFi participants operating at the settlement layer. Importantly, like 
the traditional securities transaction, the actions of the customer and 
all these DeFi participants collectively cause the transaction to be 
carried out. Accordingly, like in the securities industry, in which the 
customer, the securities broker, the securities exchange, and the 
clearing organization are all typically needed to carry out a 
securities transaction, in a DeFi transaction, the customer, the 
trading front-end service provider, the DeFi application, and the 
validator are all typically needed to carry out the DeFi transaction.
    Regarding the comment that the definition of effectuate cannot 
apply to DeFi participants that do not control the private keys to the 
customer's digital assets, as discussed in Part II.B.5. of this Summary 
of Comments and Explanation of Revisions, the Treasury Department and 
the IRS do not agree with this comment because the current broker rules 
as applied to the securities industry treat persons without custody of 
a customer's assets as a broker under section 6045. See e.g., Sec.  
1.6045-1(c)(3)(iv) and (c)(4)(iii), (iv), and (v) (Examples 3, 4, and 
5) (examples treating persons that do not hold the customer's assets as 
brokers).
2. Title of the Broker Definition in the Infrastructure Act
    Several comments argued that the existing scope of activities that 
give rise to treating a person as a broker should not be expanded to 
cover DeFi participants because section 80603(a) of the Infrastructure 
Act titled the new broker definition as a ``clarification of [the] 
definition of broker.'' One comment stated that the definition of 
broker under section 6045(c)(1)(D) is limited to agents and principals. 
Another comment stated that a broker under section 6045(c)(1)(D) must 
be a middleman. Another comment stated that a middleman under section 
6045(c)(1)(D) must be an intermediary. The Treasury Department and the 
IRS do not agree that limiting the meaning of section 6045(c)(1)(D) to 
persons

[[Page 106936]]

acting as the customer's agent or a principal in the transaction is 
required by the definition of broker under section 6045(c)(1)(A) 
through (C) because, except for section 6045(c)(1)(A), which is 
specifically limited to dealers, the definition of broker includes no 
such limitation. As discussed in Part II.B.1.a. of this Summary of 
Comments and Explanation of Revisions, under section 6045(c)(1)(B) and 
the regulations thereunder, the term broker includes a barter exchange 
that is not acting as a customer's agent or as a dealer or principal. 
Similarly, under section 6045(c)(1)(C), the term broker includes any 
other person who (for a consideration) regularly acts as a middleman 
with respect to property or services.
    Although the term middleman is not defined in the statute, the term 
is used in other tax information reporting rules to refer generally to 
persons acting in a variety of capacities relevant to the particular 
function, for example, making payment. See e.g., Sec.  1.6049-
4(a)(2)(ii) (the term ``payor'' includes a middleman as defined in 
Sec.  1.6049-4(f)(4)); Sec.  1.6049-4(f)(4)(i) (middleman means any 
person who makes payment of interest for, or collects interest on 
behalf of, another person, or who otherwise acts in a capacity as 
intermediary between a payor and a payee, and also includes a trustee). 
Outside tax law, however, the term is used more broadly to include 
persons that make referrals to others so that these others can 
negotiate a sale between themselves in addition to those that act as 
agents for others. See e.g., Dickson Marine Inc. v. Panalpina, 179 F.3d 
331 (5th Cir. 1999). In Dickson Marine Inc., the court found that an 
intermediary making a referral was a middleman and not the agent of 
another person where that other person did not assert sufficient 
control over the intermediary to establish an agency relationship. See 
also Rauscher Pierce Refsnes, Inc. v. Great Sw. Savs., F.A., 923 S.W2d 
112, 115 (Tex. App.1996) (middleman means a broker whose ``duty 
consists merely of bringing the parties together so that, between 
themselves, they may negotiate a sale, . . . [without that broker] 
necessarily [acting as] the `agent' of either party.'')
    Thus, the middleman reference in section 6045(c)(1)(C) can be 
understood as broad enough to cover a person that is not an agent or 
principal to a transaction but brings parties together so that those 
parties can negotiate and finalize the transaction. That is, DeFi 
participants provide persons with technological services that enable 
those persons to carry out DeFi transactions. Treating section 
6045(c)(1)(D) as a clarification of section 6045(c)(1)(C) renders it 
unnecessary to determine the full scope of the term middleman in 
section 6045(c)(1)(C) as applied to digital asset brokers. The 
legislative history to section 6045(c)(1)(D) supports this 
interpretation of section 6045(c)(1)(D) as a clarifying change intended 
to eliminate the need to determine which digital asset participants 
might qualify as middlemen. See the Joint Committee on Taxation's 
description of section 6045(c)(1)(D) as a clarification of the then-
existing broker definition to resolve uncertainty over whether certain 
market participants are brokers, as entered into the Congressional 
Record. 167 Cong. Rec. S5702, 5703 (daily ed. August 3, 2021) (Joint 
Committee on Taxation, Technical Explanation of Section 80603 of the 
Infrastructure Act). This conclusion is also supported by the fact that 
the clarified broker definition, along with the other changes made by 
the Infrastructure Act to sections 6045, 6045A, and 6050I, were 
estimated by the Joint Committee on Taxation to raise $28 billion over 
10 years.\10\ In contrast, an interpretation of section 6045(c)(1)(D) 
as confined to just middlemen acting as agents or principals would not 
have raised as much revenue because digital asset brokers acting in 
this capacity were already covered by the definition of broker under 
section 6045(c)(1)(C).
---------------------------------------------------------------------------

    \10\ See JCT, JCX-33-21, Estimated Revenue Effects of the 
Provisions in Division H of an Amendment in the Nature of a 
Substitute to H.R. 3684, Offered by Ms. Sinema, Mr. Portman, Mr. 
Manchin, Mr. Cassidy, Mrs. Shaheen, Ms. Collins, Mr. Tester, Ms. 
Murkowski, Mr. Warner and Mr. Romney, The ``Infrastructure 
Investment and Jobs Act'' (August 2, 2021).
---------------------------------------------------------------------------

    The policy behind the statute's clarification of the broker 
definition also supports this broader interpretation of section 
6045(c)(1)(D). Congress extended the information reporting rules under 
section 6045 to digital assets to close or significantly reduce the 
income tax gap from unreported income and to provide information about 
these transactions to taxpayers. See 167 Cong. Rec. S5702, 5703 (daily 
ed. August 3, 2021) (Joint Committee on Taxation, Technical Explanation 
of Section 80603 of the Infrastructure Act). According to the 
Government Accountability Office (GAO), limits on third party 
information reporting to the IRS is an important factor contributing to 
the tax gap. GAO, Tax Gap: Multiple Strategies Are Needed to Reduce 
Noncompliance, GAO-19-558T at 6 (Washington, DC: May 9, 2019). Third 
party information reporting generally leads to higher levels of 
taxpayer compliance because the income earned by taxpayers is made 
transparent to both the IRS and taxpayers. An information reporting 
regime requiring reporting to the IRS on digital asset transactions 
would benefit tax compliance by helping to close the information gap 
with respect to digital assets. See TIGTA, Ref. No. 2020-30-066, The 
Internal Revenue Service Can Improve Taxpayer Compliance for Virtual 
Currency Transactions, 10 (September 2020); GAO, Virtual Currencies: 
Additional Information Reporting and Clarified Guidance Could Improve 
Tax Compliance, 28, GAO-20-188 (Washington, DC: February 2020). 
Reducing the tax gap and providing information to taxpayers is no less 
important when a DeFi participant, acting as a middleman, provides 
parties with technological services that enable those parties to carry 
out the DeFi transaction. Indeed, clear information reporting rules 
that require reporting of gross proceeds from a sale of digital assets 
in DeFi transactions will help the IRS identify taxpayers who have 
engaged in these transactions. These rules will also remind taxpayers 
who engage in DeFi transactions that the transactions are taxable, 
thereby reducing the number of inadvertent errors or noncompliance on 
their Federal income tax returns. Any exception to the information 
reporting rules for DeFi participants that have access to the necessary 
information about the transactions simply because they are offering 
their services through software, instead of through human interaction, 
would reduce the effectiveness of the information reporting rules. 
Moreover, such an exception could have the unintended effect of 
incentivizing taxpayers to change how they undertake digital asset 
transactions, thus thwarting voluntary compliance and IRS enforcement 
efforts to identify taxpayers engaged in digital asset transactions 
that have not reported their income properly.
3. Legislative History
    As support for interpreting section 6045(c)(1)(D) as applicable 
only to persons acting as agents (or principals/dealers), several 
comments cited to several statements made by Senators as the 
Infrastructure Act was being considered. For example, one comment cited 
Senator Portman's statements made during a colloquy with Senator Warner 
(the colloquy), which referred to the intended purpose of the reporting 
rule not being ``to impose new reporting requirements on people who do 
not meet the definition of brokers.'' 167 Cong. Rec. S6095 (daily ed. 
August 9,

[[Page 106937]]

2021). Several comments cited Senator Warner's statements made during 
the colloquy referencing the intended application of the reporting rule 
to ``digital asset exchanges or hosted wallet providers, often called 
custodians, or other agents involved in effectuating digital asset 
transactions.'' 167 Cong. Rec. S6095 (daily ed. August 9, 2021). 
Finally, another comment argued that Congress meant to limit the 
definition of broker to custodial brokers and referenced as support an 
article that quoted Senator Toomey saying that the definition of broker 
in the legislation was overly broad and ``sweeps in nonfinancial 
intermediaries like miners, network validators, and other service 
providers . . . [that] never take control of a consumer's assets and 
don't even have the personal-identifying information needed to file a 
1099 with the IRS.'' \11\
---------------------------------------------------------------------------

    \11\ Laura Weiss, Wyden wants tweaks to infrastructure bill's 
cryptocurrency rules, Roll Call (August 2, 2023), available at: 
https://rollcall.com/2021/08/02/wyden-wants-tweaks-to-infrastructure-bills-cryptocurrency-rules/ (last visited October 17, 
2024).
---------------------------------------------------------------------------

    The Treasury Department and the IRS do not agree that these 
statements limit the Secretary's authority under section 6045(c)(1)(D) 
to only persons acting as agents (or principals/dealers). The plain 
language of the statute is the authoritative statement of a statute's 
meaning, and that language does not impose any such limitation. 
Moreover, the Senators' statements referred to in these comments, when 
read in full, reflect a fundamental concern with the potential 
application of section 6045(c)(1)(D) to persons that do not have access 
to the information needed to be reported, such as certain validators 
and developers of computer hardware and software for unhosted wallets. 
This fundamental concern was also reflected in a compromise amendment 
the Senate considered that would have revised the broker definition to 
``any person who (for consideration) regularly effectuates transfers of 
digital assets on behalf of another person.'' Importantly, this 
compromise amendment also included two rules of construction providing 
that the amended definition of broker shall not be construed to create 
any inference that such definition includes any person ``solely engaged 
in the business of--(A) validating distributed ledger transactions, 
without providing other functions or services, or (B) selling hardware 
or software for which the sole function is to permit persons to control 
private keys which are used for accessing digital assets on a 
distributed ledger.'' See 167 Cong. Rec. S6131-2 (daily ed. August 9, 
2021) (Senate Amendment 2656). See also 167 Cong. Rec. S6096 (daily ed. 
August 9, 2021) (Senator Warner's statement in the colloquy that 
persons solely engaged in validating transitions and persons solely 
engaged in selling hardware or software with the sole function of 
permitting someone to control private keys used to access digital 
assets will not be treated as brokers under the proposed compromise 
amendment).
    Although this compromise amendment was not adopted due to issues 
unrelated to the broker definition, the Treasury Department and the IRS 
have long held the view that the broker definition under section 
6045(c)(1) should not apply to ancillary parties who cannot get access 
to information that is useful to the IRS. Indeed, notwithstanding the 
authority provided by section 6045(c)(1)(C) to treat middlemen as 
brokers, the section 6045 regulations impose broker reporting 
obligations only on those market participants in the securities 
industry that have the requisite information about the securities sales 
of their customers even though other market participants that do not 
have this information also act as middlemen in carrying out these 
sales. See e.g., Sec.  1.6045-1(b)(2)(i) (stock transfer agent that 
ordinarily would not know the gross proceeds from sales not treated as 
broker); 1.6045-1(b)(2)(v) (floor broker that maintains no records with 
respect to the terms of sales not treated as broker).
    Several comments cited to private sector publications describing 
unenacted prior drafts of the Infrastructure Act legislation and in 
particular drafts of the broker definition to argue that the definition 
in section 6045(c)(1)(D) cannot be interpreted to apply to DeFi 
platforms. According to a source cited by one comment, one prior draft 
would have provided that a broker includes ``any person who (for 
consideration) regularly provides any service responsible for 
effectuating transfers of digital assets, including any decentralized 
exchange or peer-to-peer marketplace.'' \12\ According to another 
source cited by a different comment, another prior draft would have 
provided that a broker includes ``any person who (for consideration) 
regularly provides any service or application (even if noncustodial) to 
facilitate transfers of digital assets, including any decentralized 
exchange or peer-to-peer marketplace.'' \13\ The Treasury Department 
and the IRS do not agree that these reported drafts of the broker 
definition support the more limited definition proposed by the 
comments. The text of the bills referred to in these comments does not 
reflect consideration by any member of Congress because these draft 
bills were not introduced. As such, they are not legislative history 
for the enacted amendments to section 6045.
---------------------------------------------------------------------------

    \12\ Ella Beres, Crypto Tax Enforcement Update: The New Broker 
Definition in the Information Reporting Requirement Provision of the 
Infrastructure Bill Aims to Exclude Node Operators, Miners, and 
Validators, Davis Wright Tremaine LLP (August 3, 2021); available 
at: https://www.dwt.com/insights/2021/08/crypto-tax-enforcement-update.
    \13\ Jason Brett, New Language For Crypto Tax Reporting Excludes 
Decentralized Exchanges, Miners Still Vulnerable, Forbes (August 2, 
2021); available at: https://www.forbes.com/sites/jasonbrett/2021/08/02/new-language-for-crypto-tax-reporting-excludes-decentralized-exchanges-miners-still-vulnerable/?sh=41b5027b5f56.
---------------------------------------------------------------------------

    One comment referenced several proposals to amend the current 
definition of broker that were introduced after the Infrastructure Act 
was enacted. These post-enactment proposals would limit the broker 
definition to persons who effect sales at the direction of their 
customers rather than persons who provide services effectuating 
transfers. See e.g., Lummis-Gillibrand Responsible Financial Innovation 
Act, S. 2281, 118th Cong. 802 (2023) (defining the term ``broker'' to 
mean ``any person who (for consideration) stands ready in the ordinary 
course of business to effect sales of crypto assets at the direction of 
their customers''); Keep Innovation in America Act, H.R. 1414, 118th 
Cong. 2 (2023) (defining ``broker'' to include ``any person who (for 
consideration) stands ready in the ordinary course of a trade or 
business to effect sales of digital assets at the direction of their 
customers''). The comment argued that these proposals indicate an 
intent to clarify the meaning of the broker definition under section 
6045(c)(1)(D) so that the provision does not apply to DeFi 
participants. The Treasury Department and the IRS do not agree that the 
language within proposals to amend a statute offered after that statute 
is enacted are persuasive authority for how to interpret the meaning of 
the enacted statute. If anything, if the purpose of the proposed 
legislation is to change the language of the statute to prevent the 
application of the broker definition to DeFi participants, that would 
support the interpretation that the statute as enacted applies to such 
participants.

[[Page 106938]]

4. Comparison of the Broker Definition With Standards Applied by Other 
Governmental Bodies
    Several comments argued that the definition of broker as applied to 
digital assets should conform to standards developed by governmental 
bodies outside the purview of title 26. The Treasury Department and the 
IRS do not agree that rules or regulations outside the purview of title 
26 should determine the scope of these final regulations.
    Several comments argued that the definition of broker as applied to 
digital assets should be confined to persons acting as agents so that 
it would be consistent with the standard recommended by the Financial 
Action Task Force (FATF), an inter-governmental body that includes the 
United States and 39 other member nations and aims to prevent global 
money laundering and terrorist financing. In 2018, FATF modified its 
recommendations to member nations to address virtual assets and virtual 
asset service providers (VASPs).\14\ In 2021, FATF issued updated 
guidance intended to help national authorities and private sector 
entities to develop and understand anti-money laundering/counter-
terrorism financing rules as applied to virtual asset activities and 
VASPs. This guidance specifically addresses DeFi arrangements.\15\ The 
Treasury Department and the IRS do not agree that the standard set 
forth in the 2021 FATF Guidance is limited to persons acting as agents. 
The 2021 FATF Guidance specifically states that creators, owners and 
operators, and some other persons who maintain control or sufficient 
influence in the DeFi arrangements, even if those arrangements seem 
decentralized, may fall under the FATF definition of a VASP when they 
provide or actively facilitate VASP services. Moreover, FATF's Targeted 
Update on Implementation of the FATF Standards on VAs and VASPs issued 
in June 2024 reports that nearly half of surveyed jurisdictions either 
require certain DeFi arrangements to be licensed or registered as 
VASPs. Over 40 percent of remaining surveyed jurisdictions reported 
taking steps to identify and address risks in the DeFi ecosystem.\16\
---------------------------------------------------------------------------

    \14\ FATF (2018), Report to the G20 Leaders' Summit, available 
at https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Report-G20-Leaders-Summit-Nov-2018.pdf.
    \15\ FATF (2021), Updated Guidance for a Risk-Based Approach, 
Virtual Assets and Virtual Asset Service Providers, ] 67-69, pp. 27-
28, FATF, Paris. (2021 FATF Guidance), available at: https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html.
    \16\ See FATF (2024), Targeted Update on Implementation of the 
FATF Standards on Virtual Assets and Virtual Asset Service 
Providers, ] 53, p. 28. FATF, Paris, France, available at https://www.fatf-gafi.org/content/dam/fatf-gafi/recommendations/2024-Targeted-Update-VA-VASP.pdf.coredownload.inline.pdf.
---------------------------------------------------------------------------

    Several comments suggested that the broker definition under section 
6045(c)(1)(D) should be limited to custodial digital asset brokers so 
that it would be consistent with the broker reporting rules of other 
jurisdictions. As support, one comment cited the definition of 
``Reporting Crypto-Asset Service Provider'' (RCASP) under the Crypto-
Asset Reporting Framework (CARF),\17\ a framework for the automatic 
exchange of information between countries on crypto-assets developed by 
the Organisation for Economic Co-operation and Development (OECD), to 
which the United States is a party. Specifically, this comment argued 
that the proposed definition of broker would be inconsistent with the 
definition of RCASP, which provides that an RCASP includes someone that 
acts as a counterparty or intermediary in exchange transactions or that 
otherwise makes available a trading platform.\18\ Another comment 
argued that the definition of crypto asset services under the European 
Union's Markets in Crypto-Assets Regulation (MICA) \19\ also includes 
only centralized exchanges and custodial brokers.
---------------------------------------------------------------------------

    \17\ International Standards for Automatic Exchange of 
Information in Tax Matters: Crypto-Asset Reporting Framework and 
2023 update to the Common Reporting Standard, OECD Publishing, 
Paris, June 8, 2023, available at: https://www.oecd.org/en/publications/international-standards-for-automatic-exchange-of-information-in-tax-matters_896d79d1-en.html (Crypto-Asset Reporting 
Framework).
    \18\ See Rules, Section IV.B., Crypto-Asset Reporting Framework.
    \19\ Markets in Crypto-Assets Regulation (MICA) Regulation (EU) 
2023/1114 of the European Parliament and the Council of 31 May 2023 
on markets in crypto-assets, Official Journal of the European Union, 
Volume 66, June 9, 2023, available at: https://eur-lex.europa.eu/eli/reg/2023/1114/oj (MICA).
---------------------------------------------------------------------------

    The Treasury Department and the IRS do not agree that the CARF 
definition of RCASP is inapplicable to DeFi participants. Indeed, a 
frequently asked question (FAQ) relating to this issue was recently 
published by the OECD Committee on Fiscal Affair's Working Party 10, 
which is the OECD group that developed the CARF. The question addressed 
in the FAQ is whether the definition of RCASP excludes non-custodial 
services that effectuate exchange transactions.\20\ The term RCASP is 
defined as ``any individual or Entity that, as a business, provides a 
service effectuating Exchange Transactions for or on behalf of 
customers, including [. . . ] by making available a trading platform.'' 
\21\ The FAQ answer explains that, for purposes of that definition, a 
trading platform may be made available by an individual or Entity with 
or without offering custodial services. Accordingly, the CARF 
definition of RCASP does not exclude DeFi participants.
---------------------------------------------------------------------------

    \20\ OECD, Crypto-Asset Reporting Framework: Frequently Asked 
Questions, September 2024, available at https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/tax-transparency-and-international-co-operation/faqs-crypto-asset-reporting-framework.pdf.
    \21\ See Rules, Section IV.B, Crypto-Asset Reporting Framework.
---------------------------------------------------------------------------

    Finally, the Treasury Department and the IRS do not agree that the 
MICA definition of crypto-asset services is limited only to centralized 
exchanges and custodial brokers. Title 1, Article 3 of MICA defines 
crypto-asset services to include the operation of a trading platform 
for crypto-assets and the custody and administration of crypto-assets 
on behalf of clients. Recital 22 of MICA makes it clear that crypto-
asset services that are in part ``performed in a decentralised manner'' 
fall within its scope and excludes crypto-asset services only when they 
are ``provided in a fully decentralised manner without any 
intermediary.'' To the extent that assertedly decentralized DeFi 
crypto-asset service providers in fact have a degree of centralized 
control, MICA treats those service providers as within its scope. 
Moreover, financial laws or regulations of a non-U.S. government or 
union of governments do not determine the scope of U.S. tax rules.
5. Miscellaneous Comments
    One comment suggested that the broker definition under section 
6045(c)(1)(D) is limited to custodial brokers because any application 
to non-custodial brokers would be an unprecedented expansion of the 
section 6045 reporting obligations. As support for this position, this 
comment stated that the application of the transfer statement 
requirements under section 6045A(a) to certain transfers of digital 
assets to brokers reflects Congress's focus on custodial brokers 
because those rules apply only to transfers to custodial brokers. 
Additionally, this comment argued that the new reporting obligation 
under section 6045A(d), which requires reporting on certain transfers 
of digital assets from accounts maintained by a broker, also reflects 
Congress's focus on custodial brokers. The Treasury Department and the 
IRS do not agree that the broker definition under section 6045(c)(1)(D) 
is limited to only custodial

[[Page 106939]]

digital asset brokers. Section 6045A(a) cross references section 
6045(c)(1) for the definition of broker, and there is no custodial 
broker limitation in the definition of broker in section 6045(c)(1). As 
discussed in the securities industry background in Part I.A. of this 
Summary of Comments and Explanation of Revisions, a securities broker 
may or may not hold customer assets in custody. The pre-TD 10000 
regulations applied to securities brokers whether or not they provide 
custodial services. Additionally, dealers that are brokers under 
section 6045(c)(1)(A) can transact with customers without providing 
custodial services to those customers. Members of barter exchanges that 
are brokers under section 6045(c)(1)(B) can similarly exchange property 
or services with other members without the barter exchange holding 
custody of the traded property or services. See Sec.  1.6045-
1(e)(2)(i). Finally, the multiple broker rules under long-standing 
regulations illustrate fact patterns that demonstrate that not all 
persons treated as brokers under section 6045 are custodial brokers. 
See e.g., Sec.  1.6045-1(c)(3)(iv) (cash on delivery) and (c)(4)(iii) 
and (iv) (Examples 3 and 4).
    One comment suggested that the final regulations should treat as 
the broker only the DeFi participant that performs the actions without 
which the transaction could not be carried out. As the DeFi technology 
stack model shows, however, this proposed ``but for'' standard would 
most likely result in all the DeFi participants being treated as 
performing essential actions without which the transaction could not be 
carried out. The DeFi technology stack model shows that, in addition to 
the customer, there are multiple DeFi participants involved in causing 
a digital asset transaction to be carried out. Each of these DeFi 
participants provide services that are necessary to effectuate a 
transaction. The section 6045 regulations treat multiple parties in the 
securities industry that are involved in effecting a securities 
transaction as brokers and include a multiple broker rule to avoid 
duplicative reporting. As is discussed in Part III.A.1. of this Summary 
of Comments and Explanation of Revisions, however, these final 
regulations treat only one of these DeFi participants as the broker 
based on a determination of which DeFi participant is in the best 
position to provide the necessary reporting on the digital asset 
transactions of customers.
    Several comments argued that retaining the broker definition in 
Sec.  1.6045-1(a)(1) of the pre-TD 10000 regulations for digital asset 
broker reporting oversteps the statutory authority given to the 
Secretary because that definition fails to include a requirement that 
the broker's activities be undertaken ``regularly'' and ``for 
consideration'' as required under section 6045(c)(1)(D). Another 
comment recommended that this ``for consideration'' requirement be 
added to the ``trade or business'' requirement in the broker definition 
under the regulations. The Treasury Department and the IRS do not agree 
that the broker definition fails to include these requirements. A 
broker is defined in Sec.  1.6045-1(a)(1) as ``any person . . . that, 
in the ordinary course of a trade or business during the calendar year, 
stands ready to effect sales to be made by others.'' Under Groetzinger 
v. Commissioner, 480 U.S. 23 (1987), persons ``engaged in a trade or 
business . . . must be involved in the activity with continuity and 
regularity . . . for income or profit.'' Accordingly, the requirement 
that the person effect sales in the ``ordinary course of a trade or 
business'' is sufficient to ensure that the person treated as a broker 
under section 6045(c)(1)(D) ``regularly'' effects those sales ``for 
consideration.''
    One comment requested further guidance on what the ``for 
consideration'' requirement means in the context of the DeFi industry. 
Another comment argued that the ``for consideration'' requirement in 
the statute requires that the person providing the effectuating 
services earn consideration from each specific transaction effectuated 
to be included in the broker definition. The Treasury Department and 
the IRS do not agree that the text of the statute mandates such a 
narrow interpretation of this requirement or that it is necessary for 
these final regulations to address its meaning in the context of the 
DeFi industry. The same ``for consideration'' requirement has existed 
in the broker definition under section 6045(c)(1)(C) for over forty 
years, yet there is no exception for brokers providing services on an 
overall flat-fee basis or as a percentage of total invested assets. 
Moreover, such an exception would likely incentivize DeFi participants 
or other brokers to modify their fee models to avoid reporting, a 
result that would thwart the goals of information reporting.

III. Definitions of a Digital Asset Middleman and an Effectuating 
Service

    Section 1.6045-1(a)(21)(i) defines a digital asset middleman as any 
person who, with respect to a sale of digital assets, provides a 
facilitative service. Section 1.6045-1(a)(21)(iii)(B)(1) through (4) 
defines a facilitative service by referencing five specific services in 
which the broker acts either as an agent or a counterparty in a digital 
asset sale. As discussed in the Background, TD 10000 reserved on the 
portion of the facilitative services definition included in proposed 
Sec.  1.6045-1(a)(21)(iii)(A) that would have defined a facilitative 
service as any service that directly or indirectly effectuates a sale 
of digital assets, such as providing a party in the sale with access to 
an automatically executing contract or protocol, providing access to 
digital asset trading platforms, providing an automated market maker 
system, providing order matching services, providing market making 
functions, providing services to discover the most competitive buy and 
sell prices, or providing escrow or escrow-like services to ensure both 
parties to an exchange act in accordance with their obligations.
    Several comments argued that the proposed definition of 
facilitative services was too broad because it referred to services 
that both directly and indirectly effectuate sales of digital assets. 
Another comment argued that a standard that captures services that 
indirectly effectuate transactions would have no discernible limits. 
Several comments stated that this broad definition would apply the 
broker definition to internet browsers, smartphone manufacturers, 
internet service providers, and many other persons not even considered 
part of the DeFi industry because these participants arguably 
``indirectly'' effectuate transactions. One comment said that the 
definition's inclusion of services that ``indirectly'' effectuate 
transactions would treat as brokers persons who are not in the chain of 
proceeds settlement, such as fund administrators, which provide 
ancillary administrative services relating to a sale. Many of these 
comments recommended narrowing the definition of facilitative service 
to only include services that directly effectuate a sale.
    The Treasury Department and the IRS agree that the proposed 
facilitative services definition's reference to services that 
indirectly effectuate sales of digital assets is too broad. The 
Treasury Department and the IRS did not intend to include in the 
definition of broker persons not within the DeFi industry, such as 
internet service providers, internet browsers, or computer or 
smartphone manufacturers. Accordingly, to address this concern, as 
discussed in Parts III.A. through III.C. of this Summary of Comments 
and Explanation of Revisions, the final

[[Page 106940]]

regulations narrow the scope of DeFi participants that meet the 
definition of a digital asset middleman. Additionally, to make it clear 
that the reach of the digital asset middleman definition in this regard 
is not any broader than the broker definition under section 
6045(c)(1)(D), the final regulations change the term facilitative 
services used in the proposed definition of digital asset middleman to 
the term effectuating services.
    One comment stated that the definition of facilitative services 
would capture all participants described in the DeFi technology stack 
model resulting in duplicative reporting. Another comment stated that 
the facilitative services definition results in disparate treatment for 
DeFi participants in a digital asset transaction than is applied under 
current law to securities industry participants providing analogous 
services in a securities transaction. For example, this comment argued 
that the NYSE and Nasdaq are not brokers for section 6045 purposes, but 
analogous businesses in the DeFi industry would be brokers under the 
proposed facilitative services definition. Although, as discussed in 
Part II.B.1.b. of this Summary of Comments and Explanation of 
Revisions, the definition of broker under section 6045(c)(1)(D) is 
broad enough to include multiple DeFi participants involved in a DeFi 
transaction, the Treasury Department and the IRS have determined that 
such a broad definition could result in duplicative reporting. 
Accordingly, the Treasury Department and the IRS have determined that 
in these final regulations the only DeFi participants that should be 
treated as brokers are trading front-end service providers. This 
determination was made for several reasons, which are discussed in more 
detail in the remainder of this Part III. of this Summary of Comments 
and Explanation of Revisions. First, such providers are the DeFi 
participants that have the closest relationship to customers and 
therefore are in the best position to obtain customer identification 
information. Second, numerous commenters expressed concerns regarding, 
in the view of the comments, the difficulty in identifying operators of 
DeFi trading applications and the potential difficulty such operators 
would have in changing the potentially immutable code of those DeFi 
trading applications. Those concerns are not as salient to trading 
front-end service providers because those providers typically are legal 
entities or individuals and the software used to provide trading front-
end services is not immutable. Accordingly, the persons responsible for 
carrying out broker diligence and reporting will be easy for taxpayers 
and the IRS to identify, and those providers have the capability to 
modify their operations to comply with these regulations. 
Appropriately, these DeFi participants are also the participants that 
provide services that are most analogous to the functions performed by 
brokers in the securities industry.
A. Interface Layer Activities
1. In General
    In addition to other listed services, the proposed regulations 
would have included in the definition of facilitative services certain 
services that are described in the DeFi technology stack model as 
interface layer services and which are referred to in this preamble as 
trading front-end services. Specifically, proposed Sec.  1.6045-
1(a)(21)(iii)(A) would have included in the definition of facilitative 
services any service that provides a party in the sale with access to 
an automatically executing contract or protocol or digital asset 
trading platform. To illustrate the meaning of providing a party with 
such access, proposed Sec.  1.6045-1(b)(17) (Example 17) describes a 
website that matches buyers and sellers of digital assets and 
thereafter directs such buyers and sellers to use automatically 
executing contracts to settle their matched transactions and concludes 
that the website is an example of providing these access services.
    One comment suggested that instead of referring to the services 
that provide ``access to an automatically executing contract or 
protocol or digital asset trading platform,'' the final regulations 
should refer to these services as ``front-end services'' because the 
front-end term captures not only the visual elements provided by a 
website that offers these services but also the software that powers 
the interactive features of the website or mobile app, such as forms, 
buttons that initiate actions, and dynamic page updates without full 
page refreshes. The Treasury Department and the IRS agree with this 
recommendation and have adopted the front-end services terminology 
referred to herein as trading front-end services.\22\
---------------------------------------------------------------------------

    \22\ This preamble also uses the trading front-end services term 
in describing the comments received even when those comments refer 
to these services using different terms, such as user interface 
services or application programming interface.
---------------------------------------------------------------------------

    One comment stated that DeFi systems, including those created by 
software developers, operators of DeFi protocols, and trading front-end 
service providers, are purely software infrastructure used for 
communication and coordination. This comment argued that these services 
are akin to those of a phone service provider, and therefore none of 
these DeFi participants participate in the buying or selling of digital 
assets. Another comment asserted that the definition of facilitative 
services should not apply to trading front-end services used by 
customers to interact with DeFi trading applications because these 
services are merely informational services, much like those provided by 
Google, Yahoo! Finance, or Wikipedia to internet users seeking 
information. This comment argued that, in all these cases, the service 
provider is merely generating and displaying information in response to 
user inputs, and, as such, should not be treated as carrying out what 
the user does with the provided information. Another comment suggested 
that trading front-end services should not be treated as facilitative 
services because these services are merely tools that are used by 
customers to access the DeFi ecosystem. Another comment similarly 
argued that trading front-end service providers merely provide tools 
through which customers can participate on their own in a DeFi 
transaction. This comment likened coded trade order instructions to a 
torque wrench that a person purchases to repair their own car as 
opposed to engaging a licensed mechanic who already owns a torque 
wrench to repair the person's car. One comment argued that the final 
regulations should treat DeFi trading applications as brokers, not 
trading front-end service providers. In contrast to these comments, a 
few comments acknowledged that trading front-end service providers 
should be the DeFi participant treated as brokers that are required to 
report under section 6045. One comment requested that the final 
regulations clarify that trading front-end service providers are 
brokers. This comment also noted that the software used by trading 
front-end service providers to perform these services can be modified 
and customized to comply with regulatory requirements and are already 
being modified by some market participants to comply with anti-money 
laundering (AML) and Know Your Customer (KYC) obligations under the 
Bank Secrecy Act (BSA) (31 U.S.C. 5311 et seq.).
    The Treasury Department and the IRS agree that the suite of 
services offered by a trading front-end service provider, including the 
generation of customized coded trade order instructions, are

[[Page 106941]]

provided through software that is used for communication and 
coordination of functions on the distributed ledger network. The 
Treasury Department and the IRS do not agree, however, that persons 
providing trading front-end services that enable their customers to 
interact with DeFi trading applications are akin to those of a phone 
service provider or are merely providing informational services like 
that of a search engine or that such services are analogous to buying 
off-the-shelf tools to repair one's own car because trading front-end 
services enable customers to engage in DeFi transactions. As discussed 
in Part I.B.1. of this Summary of Comments and Explanation of 
Revisions, trading front-end service providers offer a suite of 
services that enable their customers to view an array of choices 
relating to their proposed trades, to input their proposed trades, and 
then to initiate the additional steps necessary to trade their digital 
assets by interacting with other DeFi participants operating within the 
distributed ledger network. The suite of trading front-end services 
also includes, in some cases, interacting with customers in advance of 
a trade order to obtain their permission for a DeFi trading protocol to 
move digital assets out of the customers' wallets and converting these 
customer permissions into software code that can later interact with 
the DeFi trading protocol when a transaction is executed by the DeFi 
trading protocol. Once the customer authorizes the transaction, the 
coded trade order instructions prepared by the trading front-end 
services determine the subsequent steps in the transaction as it is 
processed, including calling the applicable DeFi protocol's 
automatically executing contracts for automatic execution and 
settlement if the transaction is included in a block and added to the 
blockchain by a validator. Consequently, not only do the suite of 
services offered by the trading front-end service provider supply the 
customer with information, but these services are also essential and 
integral to enabling the customer's order to be communicated, 
understood, and executed by the other DeFi participants operating 
within the distributed ledger network. Accordingly, the suite of 
services provided by a trading front-end service provider are not 
analogous to a torque wrench used to repair one's own car because, once 
customers authorize or sign the transaction in their wallets, the 
functions conducted thereafter within the distributed ledger network 
are all initiated by the services provided by the trading front-end 
service provider (including the coded trade order instructions) whereas 
buyers of torque wrenches need to use their own skill to repair their 
cars. In the former case, the services provided to the customer 
effectuate the transaction via the coded trade order instructions 
whereas in the latter case, the buyer of the torque wrench, not the 
torque wrench itself, repairs the car.
    Additionally, it should be noted that trading front-end services 
are analogous to the services provided by securities brokers in the 
securities industry. When a securities broker receives an investor's 
order to sell securities, it will generally have some mechanism to 
verify the order details. The securities broker will then route the 
order to a securities exchange or other trading center for execution or 
fill or match the order internally. If a transaction is ultimately 
executed, the transaction information typically will be sent to a 
clearing organization that will record and settle the transaction by 
moving the traded securities and funds between the appropriate 
accounts. That is, once the customer has provided the trade order 
details to the securities broker and authorized the transaction, the 
remaining steps in a transaction that is executed by a securities 
exchange or other trading center take place pursuant to the securities 
broker's communications with other market participants. The securities 
broker functions as the recipient of the customer's order and the 
intermediary that typically communicates the customer's trade order to 
other market participants for eventual execution of that order.
    Like the services provided by securities brokers in the securities 
industry, a trading front-end service provider receives a customer's 
trade order, verifies the order details, and obtains confirmation from 
the customer. Although the trading front-end service provider may not 
obtain the customer's final authorization for the transactions or 
transmit the coded trade order instructions to the distributed ledger 
network, the services provided by the trading front-end service 
provider enable the customer's trade order to be communicated to the 
other DeFi participants, including the specific DeFi trading protocol 
called by the coded instructions and the other DeFi participants 
operating on the settlement layer, to execute the transaction. Indeed, 
the coded trade order instructions provided by the trading front-end 
service provider are analogous to the coded trade order instructions 
that a securities broker sends to a securities exchange or other 
trading center in a traditional securities transaction and are 
essential to carrying out the overall transaction. Accordingly, because 
these trading front-end services provide essential services that enable 
their customers to carry out DeFi transactions, the Treasury Department 
and the IRS have determined that it is also appropriate to treat these 
services as effectuating services.
    Further, the Treasury Department and the IRS understand that 
trading front-end services are typically offered by a legal entity or 
individual, which means there is a person within the meaning of section 
7701(a)(1) that would be obligated to comply with broker reporting. 
Additionally, because persons providing trading front-end services 
generally host websites, these persons provide services that interact 
directly with customers undertaking DeFi transactions. Indeed, there 
generally is an agreement between trading front-end service providers 
and their customers, under which, as part of customary onboarding 
procedures, customers are treated as having agreed to general terms and 
conditions. These agreements may be part of the compliance program used 
by trading front-end service providers to assess the customer's 
suitability with respect to economic sanctions programs administered 
and enforced by Treasury Department's Office of Foreign Assets Control 
(OFAC).\23\ As such, a person providing trading front-end services is 
the DeFi participant that is closest to the customer. In contrast, as 
discussed in Part III.B. of this Summary of Comments and Explanation of 
Revisions, some comments argued that DeFi trading applications are not 
operated by persons within the meaning of section 7701(a) and do not 
interact directly with the customer undertaking DeFi transactions. 
Additionally, unlike the potentially immutable code used by DeFi 
trading applications, the suite of services provided by trading front-
end service providers typically utilize software that is mutable. 
Accordingly, the Treasury Department and the IRS have determined that 
it is appropriate to treat trading front-end service providers as 
brokers under section 6045(c)(1)(D) for the following reasons. First, 
trading front-end service providers are the DeFi participants that have 
the closest relationship to the customers and therefore are in the best 
position to obtain customer identification information. Second, trading 
front-end

[[Page 106942]]

service providers are legal entities or individuals that can be 
identified by taxpayers and the IRS. Third, trading front-end service 
providers typically do not utilize immutable code in providing these 
services and therefore can make changes to their operations to comply 
with these regulations. Therefore, with respect to any digital asset 
sales \24\ effected by these brokers that are subject to reporting, 
these brokers must file Forms 1099-DA, Digital Asset Proceeds From 
Broker Transactions, to report the information required by that form as 
appropriate and must retain the information for seven years as required 
to be retained by Sec.  1.6045-1(d)(11)(i), such as the transaction ID 
of the reported transaction and the digital asset address from which 
the digital asset was transferred in connection with the sale. In 
addition, the required information must also be made available for 
inspection upon request by the IRS. For a discussion of the reasons why 
the Secretary exercised discretion in not treating other DeFi 
participants, such as persons that operate DeFi trading applications 
and persons that perform functions on the settlement layer, as brokers 
under section 6045(c)(1)(D), see Parts III.B. and III.C. of this 
Summary of Comments and Explanation of Revisions.
---------------------------------------------------------------------------

    \23\ See OFAC, Frequently Asked Questions: Questions on Virtual 
Currency: 560, available at: https://home.treasury.gov/policy-issues/financial-sanctions/faqs/560 (discussing OFAC compliance 
obligations for transactions using digital currency).
    \24\ Like centralized brokers, however, these trading front-end 
service providers treated as brokers are not required to report on 
the transactions identified in Notice 2024-57, 2024-29 I.R.B. 67 
(July 15, 2024), for which brokers are not required to make a return 
under section 6045(a) until further guidance is issued.
---------------------------------------------------------------------------

    Several comments argued that the facilitative services definition 
should not apply to trading front-end service providers (including 
certain unhosted wallet providers as discussed in Part III.A.2. of this 
Summary of Comments and Explanation of Revisions) because the customer 
must authorize the transaction in the customer's wallet after the 
wallet receives the coded trade order instructions from the trading 
front-end service provider and because it is the customer's wallet, not 
the trading front-end service provider, that sends the coded trade 
order instructions to the distributed ledger. One comment asserted that 
trading front-end service providers do not monitor whether a customer 
deploys the coded trade order instructions received from the trading 
front-end service provider, just as an encyclopedia does not monitor 
whether a reader uses information obtained from its pages. Another 
comment argued that, to be consistent with standards applied by other 
offices of the Treasury Department, these final regulations must adopt 
the standard used by the Financial Crimes Enforcement Network (FinCEN)
    in its guidance relating to virtual currencies. See Fin-2019-G001, 
Application of FinCEN's Regulations to Certain Business Models 
Involving Convertible Virtual Currencies, May 9, 2019 (2019 FinCEN 
Guidance). Specifically, in the view of this comment, FinCEN's 2019 
Guidance looked to whether a user had ``total independent control over 
the value [of digital assets]'' in determining whether digital asset 
businesses providing services to that user are money services 
businesses subject to AML obligations under the BSA and FinCEN's 
implementing regulations. See 31 CFR chapter X.
    The Treasury Department and the IRS considered these comments but 
do not agree that trading front-end service providers should be 
excluded from the broker definition for the following reasons. First, 
although it may be the wallet, and not the trading front-end service 
provider, that sends the coded trade order instructions to the 
distributed ledger network, it is the coded trade order instructions 
generated by the suite of services offered by the trading front-end 
service provider that ultimately call for the interaction with the DeFi 
trading protocol's automatically executing contracts and, once the 
transaction is selected for validation and included in a block, cause 
the validator to settle the transaction. These trading front-end 
services provide an essential communication function notwithstanding 
that the coded trade order instructions may not be broadcast to the 
distributed ledger network by the trading front-end service provider.
    In addition, although the preamble to TD 10000 looked to the 
application of the BSA's AML obligations as support for the conclusion 
that operators of custodial digital asset trading platforms, digital 
asset hosted wallet providers, and digital asset kiosks have 
information about their customers, the Treasury Department and the IRS 
are not required to follow the BSA or the 2019 FinCEN Guidance in 
determining whether trading front-end service providers should be 
brokers under section 6045(c)(1)(D). The AML obligations in FinCEN's 
regulations issued under the BSA apply generally to financial 
institutions, whereas information reporting under section 6045 applies 
to persons included in the definition of broker under section 
6045(c)(1). Because section 6045 did not condition the definition of 
broker on such person being a financial institution under the BSA, the 
extent to which AML obligations apply to trading front-end service 
providers does not limit the Secretary's ability to treat such persons 
as brokers under section 6045(c)(1)(D). Cf. section 6050I(c)(1)(B) 
(explicit reference to BSA).
    These final regulations are issued under title 26, and this 
preamble therefore does not address the proper interpretation of 
FinCEN's total independent control standard in the 2019 FinCEN 
Guidance. In any event, the Treasury Department and the IRS do not 
agree that a total independent control standard is the appropriate 
standard for determining whether a DeFi participant, such as a trading 
front-end service provider, provides a service that effectuates a 
transfer of digital assets as required by section 6045(c)(1)(D), or 
that a user of trading front-end services has sole control over its 
assets when it uses a trading front-end service. Trading front-end 
service providers offer a suite of services that include the 
translation of the customer's trade order input into coded trade order 
instructions that ultimately call for the interaction of the customer's 
digital assets with the DeFi trading application and, once the 
transaction is selected for validation and included in a block, cause 
the validator to settle the transaction. For example, these coded trade 
order instructions specify the number and type of digital assets to be 
removed from the customer's wallet and the type of digital assets to be 
deposited into the customer's wallet in exchange. Additionally, the 
trading front-end services also may include obtaining the customer's 
permission for the DeFi protocol to remove digital assets out of the 
customer's wallet and translating that permission into a separate set 
of instructions that will be broadcast to the distributed ledger for 
use by the DeFi protocol in future transactions authorized by the 
customer. Moreover, in some cases, a trading front-end service provider 
might take control of the customer's digital assets by routing the 
customer's digital assets to an address controlled by the trading 
front-end service provider. Accordingly, despite not holding the 
digital asset customer's private keys, once the customer authorizes or 
signs the transaction, the services provided by the trading front-end 
service provider exercise a degree of control over the customer's 
digital assets involved in transactions.
    Numerous comments argued that trading front-end service providers 
should not be treated as brokers because they are unable to backup 
withhold from the digital assets disposed by the customer in the 
transaction or the

[[Page 106943]]

digital assets received in the transaction because trading front-end 
service providers do not have custody of the private keys used for 
accessing a customer's digital assets. Another comment recommended 
that, if trading front-end service providers are treated as brokers, 
they should be exempt from any obligation to backup withhold in DeFi 
transactions. The final regulations do not adopt these comments. Backup 
withholding is an essential enforcement tool to ensure that complete 
and accurate information returns can be filed by brokers with respect 
to payments made to their customers. Accurate taxpayer identification 
numbers (TINs) provided by the customers of brokers and other 
information provided by brokers are critical to matching such 
information with income reported on a customer's Federal income tax 
return. Customers that fail to provide their TINs to a broker as 
requested may be liable for penalties under section 6723 of the Code. A 
complete exception from backup withholding for DeFi sales of digital 
assets would increase the likelihood that customers will not provide 
correct TINs to their brokers. Trading front-end service providers 
exercise a degree of control over their customer's digital assets once 
the transaction has been authorized or signed in the customer's 
unhosted wallet to withhold their fees from the customer's digital 
assets and can similarly satisfy their obligation to backup withhold 
from either the digital assets disposed by the customer in the 
transaction or the digital assets received in the transaction should 
the customer fail to provide its name, address, and TIN. The Treasury 
Department and the IRS are aware, however, that not all arrangements 
between trading front-end service providers and their customers 
currently provide for backup withholding. The Treasury Department and 
the IRS intend to publish a notice of proposed rulemaking under Sec.  
31.3406(h)-2(b) with proposed regulations that would provide trading 
front-end service providers with greater flexibility to satisfy their 
backup withholding obligations with respect to these transactions.
    One comment argued that the delivery of application-programming 
interfaces is merely the provision of hardware or software that enables 
customers to access digital assets, and the legislative history is 
clear that such activities ought not cause a person to be a broker. The 
Treasury Department and the IRS agree that persons that provide 
application-programming interface services, which is another name for 
trading front-end services, write the software code that translates the 
details of the customer's trade order into coded trade order 
instructions. The Treasury Department and the IRS do not agree that the 
definition of broker should turn on the technological nature of the 
services provided. Instead, the definition should turn on what those 
services do. Because trading front-end service providers provide 
services that their customers need in order to engage in DeFi 
transactions and that are designed specifically for that purpose, that 
is, by offering a menu of transactions for a customer to choose from 
and translating the details of the customer's trade order into coded 
trade order instructions that are used to communicate with other DeFi 
participants in order to engage in DeFi transactions, it is appropriate 
to treat these services as effectuating transfers of digital assets 
under section 6045(c)(1)(D).
    Several comments argued that because some digital asset users can 
themselves write the software code that is included in the coded trade 
order instructions, trading front-end service providers that provide 
this software coding service should not be treated as brokers. The 
final regulations do not adopt this comment because trading front-end 
service providers offer a suite of services to customers that enable 
them to engage in DeFi transactions. Moreover, that some sophisticated 
digital assets users are able to interact with DeFi trading protocols 
without the services provided by trading front-end service providers 
should not affect the obligation of trading front-end service providers 
to report on the transactions of customers that do utilize their 
services. Additionally, as discussed in Part III.B. of this Summary of 
Comments and Explanation of Revisions, the IRS intends to evaluate the 
information reported by trading front-end service providers and the 
extent to which changes in the industry enable retail digital asset 
users to use DeFi trading applications without using trading front-end 
services.
    In sum, for all these reasons, the Treasury Department and the IRS 
have concluded that trading front-end services that enable customers to 
interact with DeFi trading applications should be treated as 
effectuating services for purposes of the digital asset middleman rule. 
Accordingly, final Sec.  1.6045-1(a)(21) defines a digital asset 
middleman as any person who is responsible for providing an 
effectuating service with respect to a sale of digital assets. Final 
Sec.  1.6045-1(a)(21)(i) defines an effectuating service as any trading 
front-end service where the person providing that service ordinarily 
would know or be in a position to know the nature of the transaction 
(as defined in final Sec.  1.6045-1(a)(21)(iii)(B) and discussed in 
Part III.A.3. of this Summary of Comments and Explanation of Revisions) 
or any other service set forth in Sec.  1.6045-1(a)(21)(iii)(B)(1) 
through (5) (previously referred to as a facilitative service in TD 
10000). The final regulations use the term ``trading front-end 
service'' rather than ``front-end service'' to make it clear that only 
the front-end services that enable customers to interact with DeFi 
trading applications are included in the effectuating services 
definition. Specifically, final Sec.  1.6045-1(a)(21)(iii)(A)(1) limits 
the definition of a trading front-end service to a service that, with 
respect to a sale of digital assets, receives a person's order to sell 
and processes that order for execution by providing user interface 
services, including graphic and voice user interface services, that are 
designed to: (i) enable such person to input order details with respect 
to transactions to be carried out or settled on a distributed ledger or 
similar technology; and (ii) transmit those order details so that the 
transaction can be carried out or settled on a distributed ledger or 
similar technology, including by transmitting the order details to the 
person's wallet in such form that, if authorized or signed by the 
person, causes the order details to be transmitted to a distributed 
ledger network for interaction with a digital asset trading protocol. 
The Treasury Department and the IRS are aware that technology evolves 
rapidly. Accordingly, this definition is intended to apply broadly to 
any front-end service that enables customers to input their order 
details for interaction with a digital asset trading protocol 
regardless of the order of the steps necessary to carry out that 
transaction on the distributed ledger network. It is also intended that 
this definition will apply to any front-end service that enables 
customers to interact with aggregation protocols as well as digital 
asset trading protocols.
    Additionally, final Sec.  1.6045-1(a)(21)(iii)(A)(2) provides 
additional rules for determining whether services are trading front-end 
services. First, services are defined as trading front-end services 
without regard to whether the digital assets received upon execution of 
the transaction at a digital asset address in the wallet controlled by 
the person using the trading front-end services to dispose of digital 
assets (first person) or at a digital asset address in a wallet 
controlled by a second person,

[[Page 106944]]

including the provider of the front-end services itself. Thus, for 
example, if a first person uses services that otherwise meet the 
definition of trading front-end services to exchange digital asset A 
for digital asset B and the order details include an instruction to 
deliver digital asset B to a digital asset address in a wallet 
controlled or owned by a second person, for example, as a payment, the 
services provided by the front-end service provider will be treated as 
trading front-end services.
    Final Sec.  1.6045-1(a)(21)(iii)(A)(2) also provides that the 
transmission of order details to a distributed ledger network for 
interaction with a digital asset trading protocol includes the direct 
or indirect transmission to a distributed ledger network of order 
details that call upon or otherwise invoke the functions of 
automatically executing contracts that comprise a digital asset trading 
protocol. Accordingly, the addition of intermediate steps before the 
digital asset customer's transaction can be broadcast to a distributed 
ledger network or before the transaction can otherwise cause the 
interaction with a digital asset trading protocol, whether for business 
purposes or in an attempt to avoid meeting the trading front-end 
services definition, will not prevent the services provided by the 
trading front-end service provider from being treated as trading front-
end services. Thus, for example, the transmittal of a customer's order 
details for interaction with a DeFi aggregator application before 
interaction with a specific DeFi trading protocol that offers the most 
favorable transaction terms is an indirect transmission to a 
distributed ledger network for interaction with a digital asset trading 
protocol described in final Sec.  1.6045-1(a)(21)(iii)(A)(1)(ii). This 
rule would not, however, treat basic speech-to-text interface services 
that merely translate customer's voice commanded trade orders to 
written text orders as trading front-end services because basic text-
to-speech interface services do not invoke the functions of the DeFi 
protocol as required by final Sec.  1.6045-1(a)(21)(iii)(A)(1)(ii). 
Instead, the translated speech-to-text trade order would be sent to a 
trading front-end service provider that would, in turn, convert that 
written trade order into coded trade order instructions.
    In addition, final Sec.  1.6045-1(a)(21)(iii)(C) provides 
exceptions for certain wallet services and validation services, which 
exceptions are discussed in Parts III.A.2. and III.C. of this Summary 
of Comments and Explanation of Revisions. Additionally, final Sec.  
1.6045-1(a)(21)(iii)(D) defines a digital asset trading protocol as a 
distributed ledger application consisting of computer software, 
including automatically executing contracts, that exchange one digital 
asset for another digital asset pursuant to instructions from a user.
    One comment requested guidance regarding whether persons that offer 
front-end services for users to provide liquidity to liquidity pools or 
users to stake their assets through staking pools that issue receipts 
or tokens in exchange for the users' digital assets would be treated as 
brokers under the broker definition. Although the definition of trading 
front-end services under these final regulations could apply to front-
end services that enable users to contribute their digital assets to 
liquidity pools and to staking pools in exchange for receipts or 
tokens, brokers are not required to make returns on these transactions 
under section 6045 until a determination has been made that these 
transactions are subject to such reporting. See Sections 3.03 and 3.04 
of Notice 2024-57, 2024-29 I.R.B. 67 (July 15, 2024). The Treasury 
Department and the IRS anticipate that any termination to the no-
reporting relief in Notice 2024-57 for such transactions will take into 
account that the termination may cause persons not currently required 
to report to start doing so and therefore such persons would need some 
time to build or buy systems to comply with reporting. Finally, in 
response to the comment requesting clarification as to whether 
providing staking as a service could cause the provider to be treated 
as a broker, to the extent that such services do not give rise to the 
sale of a digital asset, the provision of those services would not 
cause the provider to be treated as a broker.
2. Unhosted Wallet Services
    Proposed Sec.  1.6045-1(a)(21)(iii)(A) included two sentences in 
the proposed definition of facilitative services that addressed the 
extent to which unhosted wallet services were included in the 
definition. The first sentence would have specifically excluded from 
the definition of facilitative services the selling of hardware or the 
licensing of software for which the sole function is to permit persons 
to control private keys which are used for accessing digital assets on 
a distributed ledger if such functions are conducted by a person solely 
engaged in the business of selling such hardware or licensing such 
software. The second sentence illustrated the limits of this proposed 
exclusion by stating that software that provides users with direct 
access to trading platforms from the wallet platform is not an example 
of software with the sole function of providing users with the ability 
to control private keys to send and receive digital assets. Proposed 
Sec.  1.6045-1(b)(23) (Example 23) illustrated the wallet exclusion 
rule by describing a wallet that neither provides ``access'' nor 
``connection services'' to a digital asset trading platform, and 
proposed Sec.  1.6045-1(b)(22) (Example 22) illustrated the limits of 
the wallet exclusion rule by describing a wallet that provides 
``access'' to a digital asset trading platform.
    One comment argued that the wallet exclusion rule's application 
only to wallets the ``sole function'' of which is to permit persons to 
control private keys was too narrow because the purpose of wallet 
software is to allow users to interact with other blockchain addresses 
(including smart contracts). The Treasury Department and the IRS do not 
agree that this exclusion is too narrow. The rationale behind the 
wallet exclusion was to exclude ancillary parties who cannot obtain 
information about sales of digital assets. Senator Warner's statements 
made during the colloquy make it clear that he intended this wallet 
exclusion to be limited to providers of those wallets for which the 
only function is to permit persons to control private keys which are 
used for accessing digital assets on a distributed ledger. 167 Cong. 
Rec. S6095-6 (daily ed. August 9, 2021). Senator Warner's expressed 
intent to provide only a limited exclusion for wallet providers is made 
even more clear when he said later in the colloquy, ``[o]f course, if 
these [wallet providers] . . . provide additional services for 
consideration that would qualify as brokerage, the rules would apply to 
them as any other broker.'' 167 Cong. Rec. S6096 (daily ed. August 9, 
2021).
    Many comments argued for a complete exclusion from the facilitative 
services definition for wallet services because, the comments stated, 
wallet providers and wallet developers typically do not have the 
information necessary to know the nature of transactions processed nor 
are they generally able to obtain that information. One comment stated 
that once the private key is exported, the wallet provider may not even 
be aware that a transaction happened if the transaction originates with 
a third-party trading front-end service provider, even though the 
digital assets disposed of in the transaction are removed from the 
user's wallet and the digital assets received in the transaction are 
received in the user's wallet. Another comment stated that unhosted 
wallet providers

[[Page 106945]]

may be able to see the digital assets leaving a wallet, but they cannot 
know the underlying details of the transaction. One comment stated that 
unhosted wallet providers do not typically know the functionality of a 
given protocol that a wallet user interacts with using the user's 
wallet.
    As discussed in Part I.B. of this Summary of Comments and 
Explanation of Revisions, providers of unhosted wallets often provide 
customers with an assortment of services. Because the rationale behind 
the wallet exclusion is to exclude ancillary parties who cannot obtain 
information about sales of digital assets, it is important to examine 
each of these services to determine if they enable the person providing 
the wallet services to obtain information about customers' sales of 
digital assets contained in the wallet. Services provided by the wallet 
for key storage and transaction authorization are performed in every 
transaction undertaken with digital assets in the customer's wallet. 
These services, however, do not provide any information to the person 
providing the wallet services regarding the underlying nature of the 
transaction. Services enabling customers to transfer native and non-
native digital assets on the distributed ledger similarly do not 
provide any information to the person providing the wallet services 
regarding the underlying nature of the transaction. Additionally, the 
connection that enables a customer to go to a third-party trading 
front-end service provider for trading front-end services also does not 
provide the person providing the wallet services with information with 
respect to the transaction because the coded trade order instructions 
in that case are created by the third-party trading front-end service 
provider. Thus, despite the transaction being sent to the customer's 
wallet for authorization or signature before it is then transmitted by 
the wallet to the distributed ledger for interaction with the DeFi 
trading application, the person providing the wallet services does not 
have visibility into the coded trade order instructions if the 
instructions are created by a third-party trading front-end service 
provider. Accordingly, the Treasury Department and the IRS have 
determined that it is appropriate to treat all these basic wallet 
services as excluded from the definition of effectuating services under 
the final regulation.
    In contrast, when the person providing the wallet services also 
provides trading front-end services for a transaction, this wallet 
provider creates the coded trade order instructions that includes the 
specifics of the customer's trade order. In that circumstance, the 
person providing these enhanced wallet services has the information 
about the underlying sale. Additionally, these persons also interact 
directly with their customers and, as such, can obtain the customer's 
identity. Accordingly, it is appropriate in these cases to treat these 
enhanced wallet trading front-end services as effectuating services 
under the final regulation and a person providing these enhanced wallet 
services as a digital asset middleman.
    Several comments requested guidance regarding the extent to which a 
developer of wallet software that provides a service that is considered 
to be a ``service effectuating'' transfers should be treated as a 
provider of that service. The extent to which a software developer 
would be treated as the provider of the software's services is a 
question of fact that depends on how the software sale or licensing 
transaction is structured and the activities provided by the software 
developer thereafter. For example, if a developer licenses or sells the 
developed software to a third party, who thereafter uses the software 
without any continuing involvement by the software developer to provide 
wallet services to customers, the software developer would not be the 
provider of the wallet services. In contrast, if the software developer 
licenses the wallet services directly to customers, the developer would 
be the provider of the wallet services. The Treasury Department and the 
IRS disagree with the comment in so far as it can be read to suggest 
that the final regulations should incorporate additional guidance 
regarding each potential factual scenario.
    One comment stated that persons providing unhosted wallet services 
do not know the identities of their customers taking part in the 
transaction. Another comment stated that these persons may have 
difficulty determining who is the beneficial owner of the digital 
assets held within the wallet, such as when more than one customer 
knows the private key or when one person opens an account on behalf of 
another person. The Treasury Department and the IRS do not agree that 
persons providing wallet services are not able to obtain the identities 
of their customers. On the contrary, a person providing wallet services 
is the DeFi participant in the best position to obtain that information 
because there generally is an agreement between the person providing 
wallet services and the customer under which, as part of customary 
onboarding procedures, such customers are treated as having agreed to 
general terms and conditions. Those terms and conditions can address 
the need to obtain customer identification information. Although, as 
suggested by the comments, it may be difficult for the person providing 
wallet services to be certain that the person controlling the private 
keys in the wallet is the beneficial owner of the digital assets held 
within the wallet, this concern is no different from any other business 
that transacts with customers electronically.
    Many comments stated that, taken together, the wallet exclusion in 
the proposed regulations would result in treating all providers of 
wallet software as brokers. Several comments argued that this wallet 
exclusion was too narrow because all wallet software provides users 
with ``access'' to digital asset trading platforms, thus, no wallet 
provider will qualify for the exclusion. Several comments stated that 
the wallet exception's reference to software that provides wallet users 
with ``direct access to trading platforms from the wallet platform'' 
made it difficult to understand how the overall wallet exclusion was 
intended to apply because ``trading platform'' and ``wallet platform'' 
were not defined in the proposed regulations. One comment argued that 
the wallet connection services referred to in proposed Sec.  1.6045-
1(b)(23) (Example 23) should not be considered a facilitative service 
because this software merely permits a wallet user to authorize 
transactions involving digital assets in the user's wallet with respect 
to a transaction initiated outside of the wallet. Some comments argued 
that this broad application of the facilitative services definition to 
persons providing wallet services was inconsistent with the stated 
intent of the proposed regulations and the legislative history of the 
amendment to section 6045.
    Several comments argued that the wallet services described in the 
wallet exclusion rule should not be limited to persons ``solely'' 
engaged in the business of selling such hardware or licensing such 
software. These comments argued that even if a person is engaged in 
other activities that constitute acting as a broker with respect to one 
transaction, those activities should not affect whether the person is a 
broker with respect to the wallet services described in the wallet 
exclusion provided with respect to a second transaction. That is, when 
a person who is a wallet provider engages in broker activities with 
respect to the first transaction, this does not affect whether that 
wallet provider can obtain the information necessary to report the 
second transaction. Several comments

[[Page 106946]]

argued that a precise interpretation of the wallet exclusion rule as 
written would result in treating wallet providers that conduct any 
other activities (even non-business hobbies) as providing facilitative 
services and as brokers for all activities. Another comment argued that 
although a well-advised wallet provider could put exempt activities 
into different legal entities to achieve a more rational result, it 
would be more appropriate to modify the rule to remove this 
restriction. Another comment suggested that this requirement would 
create a ``cliff effect'' for wallet providers, whereby a wallet 
provider that offers one service that falls within the broker 
definition will be treated as a broker for all transactions undertaken 
by customers using that provider's wallet services.
    The Treasury Department and the IRS agree that the exclusion for 
wallet services should not be limited to persons that are ``solely'' 
engaged in the business of selling such hardware or licensing such 
software. Additionally, the requirement should not cause wallet 
providers to be brokers for all transactions undertaken by customers 
using that provider's wallet services if the provider offers one 
service that falls within the broker definition. For that reason, final 
Sec.  1.6045-1(a)(21)(iii)(C)(2) provides that if a person licenses 
software or sells hardware that provides unhosted wallet services that 
include both trading front-end services with respect to some sales of 
digital assets and other services that are not trading front-end 
services (or other effectuating services under final Sec.  1.6045-
1(a)(21)(iii)(B)) with respect to other sales of digital assets, then 
that person will be treated as providing effectuating services only 
with respect to the sales of digital assets that are carried out using 
the trading front-end services provided by the unhosted wallet. 
Accordingly, persons providing unhosted wallet services must make 
information returns with respect to customer sales that are undertaken 
using the wallet's trading front-end services, but those persons are 
not required to make information returns with respect to customer sales 
that are undertaken using a third-party front-end service provider's 
trading front-end services. A wallet provider that does not provide 
trading front-end services but provides other effectuating services 
described in final Sec.  1.6045-1(a)(21)(iii)(B), however, would 
nonetheless be required to report on customer sales effected using 
those other services. Thus, for example, if a person providing unhosted 
wallet services also operates a digital asset kiosk, that person would 
be required to report on sales of digital assets undertaken by 
customers using that kiosk even if the digital assets sold were stored 
in an unhosted wallet provided by that person. Additionally, Sec.  
1.6045-1(b)(2)(x) (Example 2) has been modified to conform to this 
final rule.
3. Position To Know
    Under proposed Sec.  1.6045-1(a)(21)(i), a person performing 
facilitative services with respect to a sale would meet the definition 
of a digital asset middleman only if the nature of the services 
arrangement is such that the person ordinarily would know or be in a 
position to know the identity of the party that makes the sale and the 
nature of the transaction potentially giving rise to gross proceeds 
from the sale.
a. Position To Know the Identity of the Customer
    Proposed Sec.  1.6045-1(a)(21)(ii)(A) would have treated a person 
as ordinarily knowing or in a position to know the identity of the 
party that makes the sale if that person maintains sufficient control 
or influence over the provided facilitative services so as to have the 
ability to set or change the terms under which its services are 
provided to request that the party making the sale provide that party's 
name, address, and TIN, in advance of the sale. The proposed rule also 
would have treated this sufficient control or influence standard as 
being met if the person providing the facilitative services has the 
ability to change the fees charged for those services.
    Several comments recommended that the final regulations retain only 
the ordinarily would know standard as applied to knowing the identity 
of the customer. Other comments stated that the position to know 
standard has no reasonable limitation because virtually any provider 
could theoretically request customer information or modify the terms of 
its arrangement or fee structure. Several comments criticized the new 
standard because it does not use an objective test but rather an 
``ability'' standard which is not based on the DeFi participant's 
business model but instead is based on hypothetical circumstances. One 
comment asserted that persons that provide wallet services and 
application-programming interface services do not meet the position to 
know standard with respect to a customer's identity because, the 
comment stated, these providers have no information on the customer. In 
contrast, several comments stated that providers of user interface 
services have sufficient control or influence to add the services 
necessary to comply with the position to know standard and the proposed 
broker reporting requirements. Indeed, one comment stated that these 
interfaces can be modified and customized to comply with regulatory 
requirements and are already being modified by some market participants 
to permit AML/KYC compliance.
    As discussed in Part III.A.1. of this Summary of Comments and 
Explanation of Revisions, persons that provide trading front-end 
services work directly with customers to translate their trade order 
details into coded trade order instructions for later use. These 
services are provided pursuant to general terms and conditions that the 
customers agree to as part of customary onboarding procedures. 
Accordingly, trading front-end services can update these general terms 
and conditions as necessary to learn the identity of their customers. 
Given that trading front-end service providers have access to their 
customers and, therefore, can query them about their identity, the 
Treasury Department and the IRS have determined that it is not 
necessary in the final regulations to include the position to know 
standard as applied to the identity of the party that makes the sale. 
It should be noted that there is currently no knowledge standard for 
any other brokers regarding the identity of the customer because these 
rules only treat persons that have access to customers as brokers.
b. Position To Know the Nature of the Transaction
    Proposed Sec.  1.6045-1(a)(21)(ii)(B) would have treated a person 
as ordinarily knowing or in a position to know the nature of the 
transaction potentially giving rise to gross proceeds from a sale if 
that person maintains sufficient control or influence over the 
facilitative services provided to have the ability to determine whether 
and the extent to which the transfer of digital assets involved in a 
transaction gives rise to gross proceeds, including by reference to the 
consideration that the person receives or pursuant to the operations 
of, or modifications to, an automatically executing contract or 
protocol to which the person provides access. The proposed rule also 
would have treated this sufficient control or influence standard as 
being met if the person providing the facilitative services has the 
ability to change the fees charged for those services.
    One comment asserted that persons that provide application-
programming interface services do not meet the position to know 
standard with respect to the nature of the transaction because these 
providers have no information on

[[Page 106947]]

whether the underlying transaction actually took place. Another comment 
agreed with the proposed position to know standard's reference to 
sufficient control or influence because it is consistent with the FATF 
standard, which provides that creators, owners, and operators or some 
other persons who ``maintain control or sufficient influence'' in the 
DeFi arrangements may fall under the FATF definition of a VASP where 
they are providing or actively facilitating VASP services. 2021 FATF 
Guidance at ] 67, p. 27. Several comments stated that trading front-end 
service providers do not have visibility into the nature of the 
transaction because they do not monitor whether a customer deploys, 
through the customer's wallet, the coded trade order instructions that 
they provided. One comment questioned whether a person meets this 
standard if the person needs to implement technological changes to be 
in a position to know the nature of the transaction. Several comments 
requested that the final regulations eliminate the position to know 
standard and instead only apply the ordinarily would know standard 
because the position to know standard would force trading front-end 
service providers to modify their services to comply with the final 
regulations. One comment explained that although some trading front-end 
service providers might receive contingent trade-based fees, others 
receive non-contingent payments for their services. For example, this 
comment stated that some trading front-end services provided by 
blockchain explorers provide services that require considerable 
sophistication for customers to use and, as a result, receive their 
compensation from sources other than these customers, such as 
advertising revenue, donations, or sales of blockchain data. Trading 
front-end service providers might alternatively receive non-contingent 
periodic payments under a services agreement with a DeFi governance 
organization, such as a foundation or decentralized autonomous 
organization (DAO). This comment stated that, in the case of a services 
agreement with a DeFi governance organization, a trading front-end 
service provider might collect data on protocol use (such as, the 
number of transactions and average transaction size) in setting its 
periodic fees. The comment argued that the reviewed data on the 
protocol is anonymized by the blockchain technology and not specific 
enough to the transactions undertaken pursuant to the front-end's 
services to provide definitive information about whether these 
transactions were authorized or signed by the customer and then settled 
on the distributed ledger. Finally, regarding the proposed rule's 
reference to a person's ability to change its fees in determining 
whether a person has sufficient control or influence over its services, 
one comment requested that final regulations provide more guidance 
regarding what is meant by fees charged.
    The Treasury Department and the IRS do not agree that trading 
front-end service providers do not have the ability to know if a 
transaction for which they provided coded trade order instructions was 
ultimately executed and settled on the distributed ledger. As stated by 
the referenced comment, trading front-end service providers may receive 
contingent, trade-based fees as consideration for their services. To 
ensure that these fees are paid, trading front-end service providers 
include in the coded trade order instructions a direction for the 
requisite fee (whether withheld from the traded-away digital assets or 
the traded-for digital assets) to be sent to a wallet address owned by 
the trading front-end service provider. Because this fee will not be 
paid unless the customer authorizes the transaction in the customer's 
wallet and the transaction is settled on the distributed ledger, the 
receipt of these fees provides the trading front-end service provider 
with the information necessary to know that the transaction took place. 
Trading front-end service providers that receive non-contingent fees 
for their services also have the ability to determine whether a 
transaction created through their trading front-end services was 
carried out. For example, these providers could include in the coded 
trade order instructions a direction to notify the trading front-end 
service provider when the transaction is settled on the distributed 
ledger similar to the way the sender of an email can receive a read 
receipt. Indeed, these providers inherently have more information about 
the transaction than other persons searching the blockchain, so they 
are in a better position to obtain relevant information from the 
blockchain. Although these final regulations may require trading front-
end service providers receiving non-contingent consideration to make 
changes in the coded instructions solely for the purpose of complying 
with these broker reporting rules, this is not different from any other 
broker that makes changes in their operations to comply with these 
broker reporting rules. Accordingly, regardless of the structure of the 
trading front-end service provider's compensation, trading front-end 
service providers maintain control or sufficient influence over the 
suite of services that they offer (including the coded trade order 
instructions) to have the ability to determine whether and the extent 
to which the transfer of digital assets involved in a transaction gives 
rise to gross proceeds.
    Although trading front-end service providers should always be 
treated as maintaining control or sufficient influence over the suite 
of services that they offer (including the coded trade order 
instructions) to meet the position to know standard, the final 
regulations nevertheless have retained a modified version of the 
proposed position to know standard to ensure that other front-end 
service providers that might inadvertently be treated as providing 
trading front-end services under final Sec.  1.6045-1(a)(21)(iii)(A) 
will not be treated as providing an effectuating service under this 
definition. Accordingly, pursuant to final Sec.  1.6045-1(a)(21)(ii), a 
person providing a trading front-end service ordinarily would know or 
be in a position to know the nature of the transaction potentially 
giving rise to gross proceeds from a sale of digital assets if that 
person maintains control or sufficient influence over the trading 
front-end services to have the ability to determine whether and the 
extent to which the transfer of digital assets involved in a 
transaction gives rise to gross proceeds. The sufficient control or 
influence language used in the proposed regulations is modified to 
control or sufficient influence to draw from the language used in the 
2021 FATF guidance. See 2021 FATF Guidance at ] 67, p. 27.
    Final Sec.  1.6045-1(a)(21)(ii) also adds three examples of when a 
person would meet this control or sufficient influence standard. These 
examples are not intended to be the exclusive examples that would meet 
this standard. First, the section provides that a person providing 
trading front-end services will be considered to maintain control or 
sufficient influence over such services if that person has the ability 
to amend, update, or otherwise substantively affect the terms under 
which the services are provided or the manner in which the order is 
processed. Second, similar to the proposed regulations' reference to a 
person's ability to change their fees in determining whether a person 
has sufficient control or influence over its services, final Sec.  
1.6045-1(a)(21)(ii) provides that a person that has the ability to 
collect the fees charged for the trading front-end services from the 
transaction flow (that is, from the digital assets disposed or the 
digital assets received in the trade order) would be

[[Page 106948]]

treated as a person that maintains control or sufficient influence over 
the trading front-end services provided. This result would apply 
whether or not the person providing trading front-end services actually 
collects fees in this manner for its services. Third, final Sec.  
1.6045-1(a)(21)(ii) provides that a person providing trading front-end 
services will be considered to maintain control or sufficient influence 
over such services if that person has the ability, in connection with 
processing the order, to add to the order a sequence of instructions to 
query the distributed ledger to determine if the processed order is, in 
fact, executed or to use another method of confirmation based on 
information known to that person as a result of providing the trading 
front-end services. In contrast, a front-end service provider that 
provides services that enable a website to be accessed on a computer or 
mobile device but does not translate the customer's trade order into 
coded trade order instructions that can be sent to the customer's 
wallet for authorization would not be considered maintaining sufficient 
control or influence over the services provided to know the nature of 
the transaction. Finally, to ensure that trading front-end service 
providers do not take steps to artificially avoid meeting the position 
to know standard, final Sec.  1.6045-1(a)(21)(ii) provides that, except 
as provided by the Secretary, a contractual or other restriction not 
required by law that limits the ability of the person providing trading 
front-end services to amend, update, or otherwise substantively affect 
the terms under which the services are provided or the manner in which 
the order is processed will be disregarded for purposes of determining 
if a person meets the position to know standard. Thus, trading front-
end service providers cannot contract with their customers or with 
operators of digital asset trading protocols to limit their coding 
ability to avoid falling within the effectuating services definition.
4. Other Policy Considerations
    Several comments raised policy considerations in opposing the 
application of the digital asset middleman rules to DeFi participants. 
Some of these comments focused specifically on front-end service 
providers while others focused on DeFi trading applications or more 
generally on any DeFi participant that ultimately could be made subject 
to these rules. Several comments noted that because DeFi participants 
do not have custody of the digital asset user's private keys, they are 
not currently subject to any comprehensive regulatory oversight, such 
as rules requiring the implementation of cyber-security programs, 
business continuity or disaster recovery programs, or comprehensive 
insurance policies. One comment suggested that not being required to 
turn over personally identifiable information (PII), including their 
names, addresses, and TINs, is a key reason why digital asset users 
engage with DeFi tools and that adding this requirement would deter 
these users from interacting with DeFi trading applications. One 
comment argued that developers of DeFi systems should not be treated as 
brokers because they face much steeper difficulties in setting up 
information collection and reporting regimes because they have 
historically focused on technology development rather than financial 
services.
    The Treasury Department and the IRS do not agree that DeFi 
participants should be excluded from the information reporting rules 
under section 6045 because of a lack of financial services experience 
or because of a purported lack of comprehensive regulatory oversight. 
Persons with technology expertise that operate trades or businesses 
relating to financial services should comply with the same rules as any 
other person operating financial services businesses. Regarding the 
regulatory oversight comments, these final regulations concern Federal 
tax laws under the Internal Revenue Code only. The purported absence of 
regulatory oversight under any other legal regime that is outside the 
scope of these regulations does not govern the implementation of a 
provision under title 26. Therefore, the Treasury Department and the 
IRS are not bound to use those regimes as models in determining whether 
DeFi participants should be required to comply with an entirely 
separate set of information reporting rules under section 6045.
    Several comments argued that the application of the final 
regulations to DeFi participants would jeopardize the security of 
millions of Americans' personal data because DeFi participants are too 
small and undercapitalized to be able to store PII safely. The Treasury 
Department and the IRS did not adopt this comment for the final 
regulations because traditional brokers, including smaller brokers, 
have operated for many years and have implemented their own security 
policies and protocols.
    One comment stated that many DeFi participants are run by anonymous 
providers, which further increases the risk to customer PII. Another 
comment warned that if front-end service providers are treated as 
brokers under the final regulations, well-meaning front-end service 
providers and their customers are likely to fall victim to security 
breaches. This comment predicted the proliferation of ``spoof'' front-
end service providers set up by nefarious actors to harvest the 
personal data of digital asset users. The Treasury Department and the 
IRS do not agree that these supposed risks justify not applying the 
information reporting rules under section 6045 to the DeFi industry. 
Information reporting is essential to the integrity of the tax system. 
The argument offered by these comments could be applied to every 
industry required to file information returns. The fact that nefarious 
actors could ``spoof'' such persons or otherwise compromise customer 
PII systems is not a reason to entirely abandon a reporting regime that 
is essential to ensuring that the income (and resulting income tax) 
from these transactions are reported by taxpayers. Like other 
businesses that are obligated to collect PII and file information 
returns with the IRS, trading front-end service providers can build 
their own technologically innovative data collection and storage 
systems or they can contract with reliable third-party vendors with 
expertise in securing confidential data to do the same on their behalf.
    One comment touted the policy benefits brought by the DeFi 
industry, including reduced dependence on traditional intermediaries, 
increased financial inclusion, stimulation of capital formation, and 
democratization of financial services for traditionally oppressed 
Americans. Another comment stated that the proposed rules reflect an 
anti-technology bias that would discourage the adoption of these 
innovative privacy-preserving peer-to-peer payment technologies and 
jeopardize America's competitiveness with foreign nations. Another 
comment suggested the application of the proposed reporting rules to 
DeFi was financial discrimination. One comment suggested that the 
recent collapse of digital asset custodial exchanges, such as FTX, 
supports not applying the reporting regulations to DeFi participants, 
such as unhosted wallets.
    The Treasury Department and the IRS do not agree that these final 
regulations reflect a bias against the DeFi industry or that these 
regulations will discourage the adoption of this technology by law-
abiding customers. The information reporting rules under section 6045 
have applied in some form to brokers in the securities industry for 
over 40 years. As Senator Portman's statements made in the colloquy 
make clear, the digital asset reporting provisions were ``designed to

[[Page 106949]]

bring more clarity and legitimacy to the cryptocurrency industry by 
more closely aligning the reporting requirements with those of more 
traditional financial services, and . . . in doing so will help provide 
more certainty for people looking to invest in digital assets.'' 167 
Cong. Rec. S6096 (daily ed. August 9, 2021). Beginning for sale 
transactions on or after January 1, 2025, the regulations promulgated 
in TD 10000 will also apply to brokers acting as agents or 
counterparties in their customer's digital asset transactions. The 
application of these final regulations to the DeFi industry merely 
treats this industry like these other industries and thereby provides a 
benefit to the overall industry and to people investing in digital 
assets. Moreover, in addition to closing or significantly reducing the 
income tax gap from unreported income, one goal behind information 
reporting by brokers is to remind taxpayers who engage in DeFi 
transactions that these transactions are taxable and need to be 
reported on their Federal income tax returns. Therefore, these rules 
will also reduce the number of inadvertent errors or intentional 
misstatements shown on these taxpayers' Federal income tax returns. 
Accordingly, these final regulations will result in trading front-end 
service providers being able to provide to their customers the same 
useful information regarding gross proceeds as custodial brokers will 
provide because of the application of TD 10000. Finally, these final 
regulations concern Federal tax laws under the Internal Revenue Code 
only. The potential policy benefits brought by the DeFi industry raised 
by these comments are outside the purview of title 26.
    Several comments argued that the final regulations should not apply 
to DeFi participants because these participants cannot report on the 
customer's cost basis. One comment argued that the onus of reporting 
tax information in DeFi transactions should fall upon the customers of 
DeFi services, not DeFi participants providing those services. Other 
comments argued that the information reporting rules should not apply 
to DeFi transactions because these transactions are not so-called 
``off-ramp transactions'' that convert the owner's overall digital 
asset investment into a non-digital asset investment. The Treasury 
Department and the IRS do not adopt these comments. An exchange of one 
type of digital asset for another type of digital asset may be a 
taxable transaction despite it not being an off-ramp transaction. See 
Notice 2014-21, modified by Notice 2023-34, 2023-19 I.R.B. 837 (May 8, 
2023). In addition, notwithstanding that DeFi participants generally do 
not provide custodial services for their customers and thus would not 
be required to report on the customer's cost basis in a sale 
transaction, this does not lessen the importance of information 
reporting for gross proceeds. Clear information reporting rules that 
require reporting of gross proceeds for taxpayers who engage in digital 
asset transactions will help the IRS identify taxpayers who have 
engaged in these transactions, and thereby help to reduce the overall 
tax gap.
    Several comments recommended that the final regulations take a more 
innovative approach to broker reporting. For example, one comment 
recommended that the final regulations create a third-party reporting 
person regime, partially modeled after existing regimes to streamline 
information reporting and withholding in the cross-border payment and 
employment contexts, with which DeFi trading applications and trading 
front-end service providers could contract to store customer PII and to 
file required information returns. One comment stated that it is 
possible to innovate and build AML compliant DeFi platforms. Another 
comment recommended the use of new types of digital asset tokens, 
called tax attestation tokens, that could support DeFi brokers in 
reporting the information required under section 6045. The final 
regulations do not prescribe the tools that brokers must use in 
complying with the reporting requirements under section 6045. The 
Treasury Department and the IRS welcome input from the DeFi industry 
regarding regulatory reform or market developments that could 
facilitate innovative approaches to reporting information required 
under section 6045.
B. DeFi Application Activities
    Proposed Sec.  1.6045-1(a)(21)(iii)(A) would have included in the 
definition of facilitative services any service that provides a party 
in the sale with an automated market maker system, order matching 
services, or market making functions.
    Many comments argued that the definition of facilitative services 
should not apply to persons operating DeFi trading applications, for a 
variety of different reasons. One comment stated that DeFi trading 
applications operate using immutable automatically executing software 
that cannot be changed to accommodate broker reporting. Another comment 
similarly stated that DeFi trading applications that are operated by 
DAOs cannot be altered because although these DAOs may allow votes by 
their governance token holders on smart contracts involving 
predetermined fee tiers and other predetermined matters, they do not 
allow votes on the overhaul of the entire application to build in the 
systems required for information reporting and backup withholding. In 
contrast, another comment stated that ownership of governance tokens is 
often concentrated among a small group of investors--perhaps even a 
majority held by a single investor--that can exercise complete control 
over the development of the protocol. Several comments stated that 
existing DeFi trading applications, which do not provide for 
information reporting, cannot start reporting or be shut down to avoid 
operating without complying with section 6045 requirements because the 
existing smart contracts cannot be modified. One comment stated that 
some of DeFi trading applications generally do not have operators that 
are persons within the meaning of section 7701(a)(1) as support for the 
assertion that they could not be expecting to file and furnish 
information returns. One comment argued that DAO governance token 
holders and other operators of DeFi trading applications should not be 
brokers because they do not have access to DeFi customers and do not 
have the ability to maintain practical control over customers' 
transactions conducted using the DAO or DeFi trading applications. 
Another comment requested more guidance with clear, objective 
percentage standards regarding whether governance token holders have 
control over a DAO, such as those provided in other areas of the tax 
law. See e.g., sections 957(a) (controlled foreign corporation); 267(f) 
(controlled group); 304(c) (control). One comment argued that DeFi 
trading applications would not be in a position to know the customer's 
identity if the transaction made use of ``zero-knowledge proof'' 
technology. Another comment asserted that there is no privity of 
contract between DeFi trading applications and digital asset users; 
therefore, it would be inappropriate to treat those operating these 
applications as brokers. One comment stated that although persons are 
involved in writing the underlying software code and deploying that 
software code within DeFi trading applications, these persons are not 
involved in running those applications once the code has been deployed. 
One comment requested that the final regulations permit operators of 
DeFi protocols (other than those that are fully

[[Page 106950]]

decentralized) to employ third-party service providers to assist in 
tracking the information about transactions that take place on the 
platform to comply with tax reporting. This comment stated that at 
least one DeFi protocol operator has already supported a tax services 
provider with tax-ready data and reports for its customers to use in 
filing their Federal income tax returns.
    The Treasury Department and the IRS do not agree with all of the 
assertions made by these comments. However, as discussed in Parts III. 
and III.A. of this Summary of Comments and Explanation of Revisions, 
the only DeFi participants that are treated as brokers in these final 
regulations are trading front-end service providers. As explained in 
Parts III. and III.A. of this Summary of Comments and Explanation of 
Revisions, trading front-end service providers typically are legal 
entities or individuals that can more easily be identified by taxpayers 
and the IRS; the software code they write is not immutable; they are 
best suited to obtain information from customers; and the services they 
provide are most analogous to the services provided by conventional 
securities brokers. Accordingly, the Treasury Department and the IRS 
have determined that operators of DeFi trading applications should not 
be treated as providing services that meet the definition of 
effectuating services under the final regulations, unless these DeFi 
trading application operators also provide other services that are 
determined to be included in the definition of effectuating services.
    DeFi trading applications provide a function that contributes to 
carrying out DeFi sale transactions much like the functions provided by 
established stock exchanges (such as the NYSE or the Nasdaq) contribute 
to carrying out securities transactions in the securities industry. 
These services are not analogous to functions performed by securities 
brokers in the securities industry. It should be noted that DeFi 
trading applications are unlike stock exchanges in that DeFi trading 
applications permit any digital asset user to transact directly with 
the application whereas stock exchanges prohibit retail investors from 
trading directly on these exchanges and only permit persons that are 
regulated members of the exchange (that is, broker-dealers) to trade on 
these exchanges. Although Sec.  1.6045-1(b)(2)(ii) excludes stock 
exchanges from being treated as brokers, that exclusion is conditioned 
on those stock exchanges providing ``facilities in which others effect 
sales.'' This condition--along with the underlying regulatory 
requirements regarding membership in the exchanges--ensures that other 
brokers that are closer to the customer can provide the necessary 
reporting under section 6045. In contrast, operators of DeFi trading 
applications, including DAOs and their governance token holders, do not 
restrict access to the trading platform to regulated parties. The IRS 
intends to evaluate the information reported by trading front-end 
service providers and the extent to which changes in the industry 
enable digital asset users to use DeFi trading applications without 
using the services provided by trading front-end service providers. If 
the IRS learns that a significant amount of DeFi trading does not give 
rise to information reporting, the Treasury Department and the IRS may 
reconsider the scope of the definition of broker with respect to DeFi 
transactions.
    In specific response to the comments, the Treasury Department and 
the IRS have concluded that it is not necessary to determine at this 
time whether and to what extent DeFi trading applications are truly 
decentralized, the extent to which operators of DeFi trading 
applications (including governance token holders) can make changes to 
the underlying smart contracts and protocols to comply with broker 
reporting or hire third party service providers to do so, or whether 
operators of DeFi applications may not ever qualify as persons, within 
the meaning of section 7701(a) because these final regulations have 
determined that trading front-end service providers should be the only 
DeFi participants that are treated as the brokers under section 
6045(c)(1)(D) and required to file information returns under section 
6045 with respect to DeFi sale transactions. For the same reason, it is 
not necessary for the Treasury Department and the IRS to determine the 
extent to which a DeFi trading protocol would be in a position to know 
their customers' identities if the transaction makes use of technology 
that does not reveal the customer's identity, such as zero-knowledge 
proofs or similar technology.
    One comment argued that the counterparty to a transaction carried 
out using a DeFi trading application may be a liquidity pool and not 
the person providing that liquidity (liquidity provider). Another 
comment asserted that if liquidity providers are treated as engaging 
directly in the activities of the DeFi trading application, they could 
be brokers under the proposed regulations even though they would not 
have any way to determine the identity of the customer. The Treasury 
Department and the IRS considered these comments and have concluded 
that it is also not necessary to determine at this time whether and to 
what extent liquidity providers are the counterparties in these 
transactions or can otherwise access information about the customer 
because these final regulations have determined that trading front-end 
service providers should be the only DeFi participants that are 
required to file information returns under section 6045 with respect to 
DeFi sale transactions.
    Several comments argued that non-fungible token (NFT) marketplaces 
are the same as DeFi trading protocols and other DeFi trading 
applications. These comments stated that developers of NFT marketplaces 
are incapable of knowing the transactions that are carried out by 
customers that use their marketplaces and cannot update their software 
to require customers to comply with the broker reporting requirements. 
Because these final regulations have determined that trading front-end 
service providers should be the only type of DeFi participant that is 
required to file information returns under section 6045 with respect to 
DeFi sale transactions under these final regulations, the Treasury 
Department and the IRS have concluded that it is not necessary to 
determine at this time whether and to what extent NFT marketplaces 
operate like DeFi trading protocols. It should be noted, however, that 
persons that provide customers with trading front-end services to 
purchase or sell NFTs in exchange for other digital assets do provide 
effectuating services and are digital asset middlemen and brokers under 
these final regulations.
    One comment raised a concern regarding the extent to which a DAO 
would be treated as a person that regularly offers to redeem digital 
assets that it created or issued if it redeems ``receipt tokens'' 
issued to help users track how much of a governance token has been 
placed into a smart contract for voting purposes, which receipt tokens 
have no value and serve only to allow the user to retrieve its 
governance tokens. The Treasury Department and the IRS did not intend 
for the redemption of receipt tokens used merely to keep track of 
voting history to be treated as sales subject to reporting under these 
regulations and will consider future guidance to clarify this 
intention.
C. Settlement Layer Activities
    Proposed Sec.  1.6045-1(a)(21)(iii)(A) would have provided that a 
facilitative service does not include validating distributed ledger 
transactions (whether through proof-of-work, proof-of-stake, or any 
other similar consensus

[[Page 106951]]

mechanism) without providing other functions or services if provided by 
a person solely engaged in the business of providing such validating 
services.
    Many of the comments agreed that validation services should be 
excluded from the broker definition. Applying the DeFi technology stack 
model discussed in Part I.B. of this Summary of Comments and 
Explanation of Revisions to the effectuating services definition, the 
Treasury Department and the IRS continue to maintain that it is 
appropriate to exclude validation services from the definition of 
effectuating services. The functions performed by DeFi participants at 
the settlement layer, such as block building and validation services, 
which are responsible for settling financial transactions on the 
distributed ledger, contribute to the execution of digital asset 
transactions much in the same way as clearing organizations, such as 
The Depository Trust and Clearing Corporation (DTCC) and its 
subsidiaries, contribute to the execution of securities transactions on 
a securities exchange. Like clearing organizations in the securities 
industry, participants at the settlement layer do not interact with the 
ultimate customer and, as such, do not generally have access to the 
information that would enable them to associate the customer's identity 
with transactions settled by those participants. Indeed, in the 
securities industry, this lack of proximity to the customer--along with 
the fact that other participants are closer to the customer--supports 
not treating clearing organizations as brokers. See Sec.  1.6045-
1(b)(2)(vii). Consistent with this understanding that participants at 
the settlement layer do not interact with the ultimate customer, 
several Senators expressed a concern with treating persons that perform 
validation services as brokers in the deliberations leading up to the 
passage of the Infrastructure Act. For example, Senator Portman said 
during the colloquy, ``[w]e want to be sure that miners and stakers and 
others who play a key role in validating transactions now or in the 
future . . . will not be subject to the [broker reporting] rules for 
those activities.''). 167 Cong. Rec. S6096 (daily ed. August 9, 2021).
    Several comments focused on the ``without providing other functions 
or services'' limitation to the carve-out for validation services. One 
comment argued that when a validator performs other functions or 
services, it does not enhance a validator's ability to know the 
identities of the parties whose transactions it validated. Another 
comment referenced the DeFi technology stack model to argue that the 
regulations should more clearly exempt all settlement layer service 
providers from the definition of broker. Numerous other comments 
provided descriptions of additional functions that they said either 
were a component of validation services or otherwise should be treated 
similarly to validation services. Specifically, these comments urged 
the Treasury Department and the IRS to exclude ordering services, block 
arranging services, block-proposing services, communication node 
operation services and other similar network services that operate on 
the settlement layer. One comment suggested that persons that record 
transactions on secondary networks that are built on top of (or beside) 
a primary distributed ledger (layer 2 blockchains) using sequencer 
software should be treated like validators for this purpose. Similarly, 
another comment pointed out that to facilitate more transactions, some 
distributed ledgers enable transactions to be aggregated on a layer 2 
blockchain before being recorded as a single transaction on the primary 
distributed ledger. In these cases, this comment asserted that persons 
that validate transactions on this secondary network should be 
excluded. Another comment suggested excluding validators that 
participate in so-called liquid staking protocols. One comment argued 
that unhosted wallet providers, DeFi protocols, and price discovery 
services should be excluded as analogous to validators.
    As discussed in Part III.A.1. of this Summary of Comments and 
Explanation of Revisions, the Treasury Department and the IRS have 
determined that the only DeFi participant that should be treated in 
these final regulations as providing effectuating services for purposes 
of the reporting rules under section 6045 in a sale is the DeFi 
participant that provides trading front-end services. Accordingly, an 
exclusion for validation services--which are not trading front-end 
services--is technically no longer necessary. Nevertheless, given the 
strong concern expressed by members of Congress and others in the 
industry that these ancillary services be excluded, the final 
regulations retain this exclusion for validation services and expand it 
to also include those services necessary to complete the validation. It 
is intended that block building as well as the operation of 
communication nodes would be included in the other services necessary 
to complete the validation, and thus excluded from the definition of 
effectuating services. Without expressing any view regarding the extent 
to which the other services raised by the comments are analogous to 
these validation services, the Treasury Department and the IRS have 
determined that it is not appropriate to expand the exclusion from the 
definition of effectuating services for validation services any 
further. First, as noted, the exclusion is not necessary now that 
trading front-end services are the only DeFi services that are treated 
as effectuating services. As long as these other services do not fit 
within the definition of trading front-end services, they will not be 
treated as effectuating services under the final regulations. Second, 
the list of services that are not trading front-end services is 
potentially infinite and can change over time. It is not practical or 
appropriate to draft a list of all the services within the DeFi 
industry that do not fit within the definition of trading front-end 
services.
    Several comments argued that the proposed carve-out for validation 
services is too narrow because it would be limited to persons 
``solely'' engaged in the business of providing distributed ledger 
validation services. These comments argued that the exclusion should 
remain available even for persons who are engaged in more than one 
trade or business or providing more than one type of service. Another 
comment pointed out that, as drafted, the carve-out seemingly would not 
apply to persons conducting validation services only as a hobby or 
without a profit motive. One comment recommended that the exclusion 
instead be based on the functions or services conducted with respect to 
the transaction. Another comment requested additional examples to 
clarify the circumstances in which validation services would be 
considered facilitative services.
    The Treasury Department and the IRS agree that the carve-out for 
validation services should not be limited to persons that are 
``solely'' engaged in the business of performing such services. Rather, 
the intent of the carve-out was to exclude validators from reporting on 
sales for which they provide validation services unless those 
validators also performed other services with respect to those same 
sales that would be treated as effectuating services. Accordingly, 
final Sec.  1.6045-1(a)(21)(iii)(C)(1) provides that providing 
distributed ledger transaction validation services (whether through 
proof-of-work, proof-of-stake, or any other similar consensus 
mechanism), including those services necessary to complete the 
validation, are not an effectuating service under final Sec.  1.6045-
1(a)(21)(i). Additionally, an example is added at final Sec.  1.6045-

[[Page 106952]]

1(b)(24) to illustrate that the exclusion applies only to the 
validation services provided. It does not apply when validators also 
perform trading front-end services because those validators must report 
sales carried out as a result of those trading front-end services. 
Thus, if a validator, as part of its ordinary course of a trade or 
business, provides trading front-end services with respect to a sale 
for a customer and thereafter also validates that sale (likely without 
even knowing that validated block included the customer's sale), the 
validator would be required to report on the sale as a result of 
providing the trading front-end services notwithstanding that the 
validator also validated the sale.

IV. Multiple Broker Rule

    The proposed regulations did not extend the multiple broker rule 
under Sec.  1.6045-1(c)(3)(iii) of the pre-TD 10000 regulations to 
digital asset brokers, but instead asked for comments regarding the 
best way to apply a multiple broker rule. Comments overwhelmingly 
requested that the final regulations implement a multiple broker rule 
applicable to digital asset brokers to avoid burdensome and confusing 
duplicative reporting. In response, TD 10000 added a multiple broker 
rule under Sec.  1.6045-1(c)(3)(iii)(B) that applies if more than one 
digital asset broker effects the same sale. Under that rule, the broker 
crediting the gross proceeds to the customer's wallet address or 
account (the crediting broker) must report the transaction to the IRS. 
The other broker can generally avoid reporting if it obtains proper 
documentation from the crediting broker that the crediting broker is a 
U.S. digital asset broker. The preamble to TD 10000 also indicated that 
the Treasury Department and the IRS are continuing to study the 
question of how a multiple broker rule would apply to the non-custodial 
(DeFi) digital asset industry.
    Many comments pointed out that a customer engaging in any DeFi 
transaction may use the services of many DeFi participants, including 
interface providers, wallet software providers, and DeFi protocols. To 
the extent the final regulations deem all of these DeFi participants to 
be brokers, their overlapping reporting obligations would create 
duplicate reporting and unnecessary compliance costs. Because these 
final regulations treat only trading front-end service providers as a 
broker and because only one front-end service provider translates the 
customer's trade order details into coded trade order instructions, 
there should generally be only one DeFi participant that is a broker 
under section 6045(c)(1)(D) in a DeFi transaction. The Treasury 
Department and the IRS are not aware of multiple broker fact patterns 
in which more than two types of brokers could be involved in a DeFi 
sale. If such a case did exist, however, the existing multiple broker 
rule in Sec.  1.6045-1(c)(3)(iii)(B) would apply to ensure that only 
one of the two brokers report on the transaction. Further, the Treasury 
Department and the IRS intend to issue a notice of proposed rulemaking 
that will propose examples illustrating how the existing multiple 
broker rule would apply to transactions like this that are effected by 
both a front-end service provider and a custodial broker to obtain 
comments from the public regarding the application of the existing 
multiple broker rule in Sec.  1.6045-1(c)(3)(iii)(B) to such 
transactions.

V. Comments Based on Constitutional Concerns

A. Major Questions Doctrine
    Several comments alleged that the proposed regulations, if 
finalized, would raise major questions doctrine concerns under West 
Virginia v. EPA, 597 U.S. 697 (2022).\25\ One comment alleged that the 
IRS ``literally has no power to act . . . unless and until Congress 
confers power upon it,'' La. Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 
374 (1986), and that Congress's use of the term ``broker'' did not 
authorize the IRS to impose onerous requirements on every person 
tangentially involved in cryptocurrency or other digital assets. The 
comment claimed that the proposed regulations, if finalized, would 
eliminate DeFi transactions and fundamentally transform non-custodial 
wallet services and that Congress withheld that authority from the 
Treasury Department and the IRS even though Congress amended section 
6045 to allow for broker reporting on digital asset transactions. 
Another comment claimed that the Treasury Department and the IRS should 
be especially careful not to encroach on Congress's policymaking power 
in light of the ongoing congressional debate about how digital assets 
should be treated and regulated and the economic importance of the 
digital asset industry. The comment alleged that amended section 6045 
does not provide any clear congressional authorization that could give 
the IRS the right to dictate important policy decisions about digital 
assets.
---------------------------------------------------------------------------

    \25\ The major question doctrine is a canon of construction that 
bars agencies from resolving questions of ``vast economic and 
political significant'' without clear statutory authorization.
---------------------------------------------------------------------------

    The Treasury Department and the IRS do not agree that these final 
regulations are prohibited by the major questions doctrine. The major 
questions doctrine is only implicated when an agency claims an 
extraordinary grant of regulatory authority based on ``modest words,'' 
``vague terms,'' or ``subtle devices,'' and the ``history and the 
breadth'' of the agency's asserted power provide a reason to hesitate 
before concluding that Congress meant to confer such authority. West 
Virginia v. EPA, 597 U.S. at 721 and 723.
    Section 80603 of the Infrastructure Act made several changes to the 
broker reporting provisions under section 6045 to clarify the rules 
regarding how certain digital asset transactions should be reported by 
brokers. These clarifications are not mere ``modest words,'' ``vague 
terms,'' or ``subtle devices.'' Section 6045(c)(1)(D) provides that a 
broker includes ``any person who (for consideration) is responsible for 
regularly providing any service effectuating transfers of digital 
assets on behalf of another person.'' As discussed in Part II. of this 
Summary of Comments and Explanation of Revisions, this statutory 
language extends to treating DeFi industry participants as brokers.
    Furthermore, these final regulations do not claim or exercise an 
extraordinary grant of regulatory authority. As discussed in Part 
III.A.1. of this Summary of Comments and Explanation of Revisions, the 
only DeFi participant treated as providing effectuating services for 
purposes of these final regulations is the DeFi participant that 
provides trading front-end services. These front-end services are 
analogous to the services provided by securities brokers in the 
securities industry, which are already subject to section 6045 broker 
reporting.
B. Comments Based on the First, Fourth, and Fifth Amendments
    Multiple comments alleged that the proposed regulations, if 
finalized, would violate the First, Fourth, and Fifth Amendments to the 
U.S. Constitution on a variety of asserted bases, some of which apply 
to DeFi participants. As discussed in the preamble to TD 10000, the 
final regulations do not violate the First Amendment because they do 
not compel political or ideological speech by DeFi participants and 
merely require information reporting for Federal tax compliance 
purposes, a sufficiently important governmental interest. See 89 FR 
56520. The final regulations also do not violate the Fourth Amendment 
as

[[Page 106953]]

applied to DeFi participants because, as explained in the preamble to 
TD 10000, the Fourth Amendment's protections extend only to items or 
places in which a person has a constitutionally protected reasonable 
expectation of privacy. See 89 FR 56520, 56521.
    As mentioned in the preamble to TD 10000, some comments stated that 
the definition of broker, effect, and digital asset middleman are 
unconstitutionally vague. See 89 FR 56521. The Due Process Clause of 
the Fifth Amendment provides that ``no person shall . . . be deprived 
of life, liberty, or property, without due process of law.'' This 
provision has been interpreted to require that statutes, regulations, 
and agency pronouncements define conduct subject to penalty ``with 
sufficient definiteness that ordinary people can understand what 
conduct is prohibited.'' See Kolender v. Lawson, 461 U.S. 352, 357 
(1983). The relevant test is that a ``regulation is impermissibly vague 
under the Due Process Clause of the Fifth Amendment if it `fails to 
provide a person of ordinary intelligence fair notice of what is 
prohibited, or is so standardless that it authorizes or encourages 
seriously discriminatory enforcement.''' United States v. Szabo, 760 
F.3d 997, 1003 (9th Cir. 2014) (quoting Holder v. Humanitarian Law 
Project, 561 U.S. 1, 18 (2010)).
    The final regulations are not unconstitutionally vague. As 
discussed in Part II. of this Summary of Comments and Explanation of 
Revisions, the statutory definition of broker is broad enough to 
include multiple DeFi participants involved in a DeFi transaction. 
Despite this broad statutory definition of broker, the final 
regulations are more narrowly tailored so that they apply only to those 
DeFi participants that provide services analogous to those performed by 
brokers in the securities industry. Section 1.6045-1(a)(1) defines a 
broker as ``any person . . . that, in the ordinary course of a trade or 
business during the calendar year, stands ready to effect sales to be 
made by others.'' Section 1.6045-1(a)(10)(i)(D) added to the definition 
of effect to act as a digital asset middleman for a party in a sale of 
digital assets. Digital asset middleman was defined in Sec.  1.6045-
1(a)(21)(i) as any person who, with respect to a sale of digital assets 
provides a facilitative service. Proposed Sec.  1.6045-1(a)(21)(iii)(A) 
would have defined a facilitative service as any service that directly 
or indirectly effectuates a sale of digital assets. Rather than 
maintain this broad definition of a facilitative service, final Sec.  
1.6045-1(a)(21)(iii)(A) defines an effectuating service as a trading 
front-end service and other narrowly identified effectuating services. 
Final Sec.  1.6045-1(a)(21)(iii)(A)(1) defines these trading front-end 
services with sufficient specificity to avoid due process concerns.

VI. Applicability Dates and Penalty Relief

    One comment, pointing to the safe harbor rules generally applicable 
under section 6721(c)(3) of the Code to de minimis transactions, 
requested penalty relief for persons who unknowingly and 
unintentionally engage in activities that result in such persons being 
brokers under the final regulations if such persons remain below a de 
minimis threshold for the number and/or value of transactions should 
have this relief effected during a start-up or transitional period. 
Alternatively, or potentially in addition to this request for a 
temporary de minimis threshold, this comment requested a permanently 
applicable ``grace period'' for any industry participant that has 
unintentionally violated the information reporting requirements under 
section 6045 after qualifying as a broker during which grace period 
such person can either come into compliance or adjust its activities so 
as to avoid qualifying as a broker, without immediately facing 
penalties. The IRS does not agree that it is appropriate to provide 
penalty relief for start-up brokers whose services effectuate 
transactions during a grace period or that fall below a de minimis 
threshold beyond that relief already in place under section 6721(c)(3) 
for de minimis reporting errors or under section 6724 of the Code for 
errors that are due to reasonable cause because this type of relief is 
not generally provided for other information reporting provisions. See 
e.g., section 6041 (applicable to all persons engaged in a trade or 
business making payments in the course of such trade or business). 
Persons providing trading front-end services to customers as a trade or 
business are expected to investigate all the legal requirements of 
conducting that trade or business. Relief for those that do not 
properly investigate beyond the existing de minimis rules or the 
reasonable cause penalty relief under section 6724 is, therefore, not 
appropriate.
    The Treasury Department and the IRS received and considered many 
comments about the applicability dates contained in the proposed 
regulations. Multiple comments requested additional time beyond the 
proposed applicability date for gross proceeds reporting by DeFi 
participants on transactions occurring on or after January 1, 2025, so 
that newly-reclassified brokers could build compliance programs 
properly. The comments generally asked for more time, ranging from one 
to five years after publication of the final rules, to prepare for 
reporting transactions, with the most common suggestion being an 
applicability date between 18 and 24 months after publication of the 
final regulations. Several comments suggested that broker reporting 
begin at the same time as CARF reporting, either for all brokers or for 
non-U.S. brokers. Multiple comments requested that the final 
regulations become applicable in stages, with many suggesting that 
custodial industry participants should be required to report during the 
first stage and that DeFi participants should begin reporting a year or 
more later. Comments generally pointed to the time needed to build 
information reporting systems and to adequately document customers to 
support their recommendation of later applicability dates. They also 
cited concerns about fulfilling backup withholding requirements and 
adapting to filing a new information return, the Form 1099-DA, Digital 
Asset Proceeds From Broker Transactions, and about the IRS's ability to 
receive and process a large number of new forms.
    The Treasury Department and the IRS previously determined that a 
phased-in or staged approach to broker reporting is appropriate. 
Accordingly, TD 10000 requires gross proceeds reporting generally for 
sales occurring on or after January 1, 2025, for custodial industry 
participants (and certain brokers acting as counterparties in a 
transaction). Additionally, TD 10000 requires basis reporting for sales 
occurring on or after January 1, 2026, but only with respect to digital 
assets the customer acquired from, and held with, the same broker on or 
after January 1, 2026. The preamble to TD 10000 stated that the 
Treasury Department and the IRS intend to expeditiously issue separate 
final regulations describing information reporting rules for DeFi 
industry participants and these rules would be finalized with an 
appropriate, separate applicability date.
    Although the applicability date proposed by the proposed 
regulations applied to gross proceeds reporting for sales of digital 
assets effected on or after January 1, 2025, the Treasury Department 
and the IRS agree that a delay is warranted for trading front-end 
service providers treated as brokers (DeFi brokers) under these final 
regulations. First, many of these DeFi

[[Page 106954]]

brokers may not have systems in place to collect and store customer 
identity information or contracts with third-party service providers to 
do the same. Second, many of these DeFi brokers also may not have 
systems in place to collect, store, and report customer transaction 
information or contracts with third-party service providers to do the 
same. Third, many of these DeFi brokers also do not have backup 
withholding systems that would enable these brokers to backup withhold 
and pay the backup withholding tax in cash. Based on these 
considerations, final Sec.  1.6045-1(a)(21) applies to sales of digital 
assets occurring on or after January 1, 2027.
    The IRS intends to work closely with stakeholders to ensure the 
smooth implementation of the reporting rules, including the mitigation 
of penalties in the early stages of implementation for all but 
particularly egregious cases involving intentional disregard of these 
rules. Accordingly, to promote industry readiness to comply with the 
backup withholding requirements that will apply to newly required 
reporting required by these final regulations, Notice 2025-3 is being 
issued contemporaneously with these final regulations to provide 
transitional relief from broker reporting penalties and backup 
withholding under section 3406 on these sales. This Notice, which will 
be published in the Internal Revenue Bulletin, provides that the 
effective date for backup withholding is postponed to January 1, 2028, 
for potential backup withholding obligations imposed under section 3406 
for payments required to be reported by DeFi brokers on Forms 1099-DA, 
Digital Asset Proceeds From Broker Transactions, for sale transactions. 
Additionally, the Notice provides that the IRS will not assert 
penalties for a DeFi broker's failure to deduct, withhold, and pay any 
backup withholding tax with respect to calendar year 2028 that is 
caused by a decrease in the value of received digital assets between 
the time of the transaction giving rise to the backup withholding 
liability and the time the broker liquidates 24 percent of the received 
digital assets, provided the broker undertakes to effect that 
liquidation immediately after the transaction giving rise to the backup 
withholding liability. For sale transactions effected in 2028 for 
customers that have opened accounts with the broker prior to January 1, 
2028, the Notice further provides that backup withholding will not 
apply with respect to any payee that furnishes a TIN to the broker, 
whether or not on a Form W-9 in the manner required in Sec. Sec.  
31.3406(d)-1 through 31.3406(d)-5, provided the broker submits that 
payee's TIN to the IRS's TIN matching program and receives a response 
that the TIN furnished by the payee is correct. See Sec.  
601.601(d)(2).
    In addition to this specific DeFi industry relief, the backup 
withholding relief provided in Notice 2024-56, 2024-29 I.R.B. 64 (July 
15, 2024), also applies to the DeFi industry. For example, Notice 2024-
56 applies to digital asset sales effected by a DeFi broker under these 
final regulations where the reportable proceeds is a specified NFT. 
Additionally, the backup withholding relief provided in Notice 2024-56 
for PDAP sales effected by a PDAP will also be applicable to PDAP sales 
effected by a DeFi broker that is also PDAP. This relief for PDAP 
sales, however, does not apply to the extent the sale is also another 
type of sale described in Sec.  1.6045-1(a)(9)(ii)(A) through (C), such 
as a sale of digital asset A for digital asset B, because Sec.  1.6045-
1(a)(9)(ii)(D) provides that a sale that is a PDAP sale and another 
type of digital asset sale is not treated as a PDAP sale.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6(b) of Executive Order 12866, as amended. Therefore, a 
regulatory impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
generally requires that an agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a valid control number assigned by the 
Office of Management and Budget.
    In general, the collection of information in the regulations is 
required under section 6045 and the collection of information in these 
regulations is set forth in Sec.  1.6045-1. The IRS intends that the 
collection of information pursuant to section 6045 and these 
regulations will be conducted by way of Form 1099-DA. In accordance 
with the PRA, the reporting burden associated with the collection of 
information in these final regulations will be reflected in PRA 
submissions associated with Form 1099-DA (OMB control number pending). 
On April 22, 2024, the IRS published in the Federal Register (89 FR 
29433) a Notice and request for comments on the collection of 
information requirements related to the broker regulations with a 60-
day comment period. On October 7, 2024, the IRS published in the 
Federal Register (89 FR 81151) a second Notice and request for comments 
on the collection of information requirements related to the broker 
regulations with a 30-day comment period. To the extent there is a 
change in burden as a result of these final regulations, the change in 
burden will be reflected in an update to the burden estimate for Form 
1099-DA prior to the collection of information required under these 
regulations.
    The proposed regulations contained burden estimates regarding the 
collection of information with respect to the dispositions of digital 
assets. For the proposed regulations, the Treasury Department and the 
IRS estimated that approximately 600 to 9,500 brokers would be impacted 
by the proposed regulations, which would have applied to all digital 
asset brokers. The proposed regulations contained an estimate of 13 to 
16 million customers that would have transactions subject to the 
proposed regulations. The proposed regulations also contained an 
estimate of the average time to complete the Form 1099-DA for each 
customer as between 7.5 minutes and 10.5 minutes, with a mid-point of 9 
minutes (or 0.15 hours). Taking the midpoints of the ranges for the 
number of brokers expected to be impacted by the proposed regulations, 
the number of taxpayers expected to receive one or more Form 1099-DA, 
and the time to complete the Form 1099-DA (5,050 brokers, 14.5 million 
recipients, and 9 minutes respectively), the proposed regulations 
estimated the average broker would incur 425 hours of time burden and 
$27,000 of monetized burden for the ongoing costs per year. The 
proposed regulations contained estimates of 2,146,250 total annual 
burden hours and $136,350,000 in total monetized annual burden.
    The proposed regulations estimated start-up costs to be between 
three to eight times annual costs. Given that the Treasury Department 
and the IRS expected the per-broker annual estimated burden hours to be 
425 hours and $27,000 of estimated monetized burden, the proposed 
regulations estimated per broker start-up aggregate burden hours to 
range from 1,275 to

[[Page 106955]]

3,400 hours and $81,000 and estimated aggregate monetized burden of 
$216,000. Using the midpoints, start-up total estimated aggregate 
burden hours was 11,804,375 and total estimated monetized burden was 
$749,925,000.
    Numerous comments were received on the estimates contained in the 
proposed regulations. In general, the comments claimed the proposed 
regulations underestimated the burden hours and monetized burden. The 
comments that were related to the burden associated with the specific 
information required to be reported on Form 1099-DA were addressed in 
the preamble to TD 10000. See 89 FR 56539-56541. In addition, multiple 
comments said that the estimated number of brokers impacted by the 
proposed regulations was too low. The comments that did not distinguish 
between centralized brokers or DeFi brokers under the proposed 
regulations were addressed in the preamble to TD 10000. Id.
    Some of the comments specifically addressed DeFi participants. One 
comment said the estimated number of overall brokers identified in the 
proposed regulations was too low because it underestimated the impact 
on decentralized autonomous organizations, governance token holders, 
operators of web applications, and other similarly situated potential 
DeFi participants. As discussed in Part III. of this Summary of 
Comments and Explanation of Revisions, the Treasury Department and the 
IRS have determined that it is appropriate to treat DeFi participants 
that provide trading front-end services as brokers under section 6045. 
The Treasury Department and the IRS have also determined that it is not 
appropriate to treat decentralized autonomous organizations, governance 
token holders, or operators of web applications as brokers subject to 
the reporting requirements unless they also provide trading front-end 
services, and only with respect to the sales of digital assets that are 
carried out using the trading front-end services. Accordingly, this 
burden analysis does not attempt to include any of the DeFi 
participants that these final regulations do not treat as brokers.
    Numerous comments expressed an overall concern with the reporting 
burden associated with the proposed regulations but did not 
specifically address the estimated number of brokers, number of 
recipients, or time needed to complete the reports. Many of these 
comments expressed a concern that the reporting requirements in the 
proposed regulations would reduce the benefits of customers engaging in 
DeFi transactions. Several comments described the benefits of DeFi, 
with one comment specifically mentioning that these benefits include 
best execution, lower fees, faster transaction times, enhanced personal 
information protection greater privacy, and the avoidance of conflicts 
of interest. These comments generally claimed that the reporting 
required by the proposed regulations would place significant costs on 
DeFi participants thereby reducing the benefits of engaging in DeFi 
transactions.
    Other comments stated that DeFi participants do not currently have 
systems in place to comply with tax recordkeeping requirements. One 
comment claimed that the proposed regulations would result in DeFi 
participants spending more resources requesting, collecting, managing, 
and securing information than they spend conducting their current 
businesses. Another comment claimed that it would be economically 
prohibitive for DeFi participants to build and maintain broker 
reporting infrastructure systems because the services these DeFi 
participants provide are typically offered at little cost compared to 
similar services offered by traditional securities brokers. In 
addition, this comment claimed that the proposed regulations, if 
finalized, would require DeFi participants to build infrastructure 
systems to collect private information on users despite never holding 
any customer assets.
    The Treasury Department and the IRS understand that these final 
regulations will impose costs on DeFi participants. As discussed in 
Part III. of this Summary of Comments and Explanation of Revisions, 
however, the final regulations narrow the scope of DeFi participants 
that the proposed regulations treated as brokers required to report 
under section 6045 to those DeFi participants providing trading front-
end services. The final regulations treat only trading front-end 
service providers as brokers (DeFi brokers) under section 6045 for 
several reasons, including that these DeFi participants have the 
closest relationship to customers and therefore are in the best 
position to request, collect, and manage the information, including the 
personal identification information, required to be reported. 
Additionally, DeFi participants that provide trading front-end services 
provide functions that are most analogous to the functions provided by 
securities brokers. As discussed in Part II.B.A. of this Summary of 
Comments and Explanation of Revisions, the Treasury Department and the 
IRS have concluded that the definition of broker should not depend on 
the specific technology used to effect transfers of digital assets. 
While certain technologies may allow DeFi brokers to be more cost-
effective in their business operations, their choice to use these 
technologies should not influence their inclusion in the definition of 
broker and their requirement to comply with the reporting obligations.
    Books or records relating to a collection of information must be 
retained so long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103 of 
the Code.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires 
agencies to ``prepare and make available for public comment an initial 
regulatory flexibility analysis,'' which will ``describe the impact of 
the proposed rule on small entities.'' 5 U.S.C. 603(a). Unless an 
agency determines that a proposal will not have a significant economic 
impact on a substantial number of small entities, section 603 of the 
RFA requires the agency to present a final regulatory flexibility 
analysis (FRFA) of the final regulations. The Treasury Department and 
the IRS have not conclusively determined whether these final 
regulations will have a significant economic impact on a substantial 
number of small entities. This uncertainty is based in part on a lack 
of sufficient information about the industry and therefore, any 
determination requires further study. Because there is a possibility of 
a significant impact on a substantial number of small entities, a FRFA 
is provided in these final regulations.

[[Page 106956]]

    While the Treasury Department and the IRS were unable to find 
information to estimate the number of trading front-end service 
providers, there is some information that can be used to estimate the 
number of DeFi trading protocols. For example, one data aggregator 
states that it tracks more than 5,042 different protocols across 328 
blockchains and trading volume for 613 DeFi trading protocols (which it 
calls DEX).\26\ Another data aggregator states that it tracks 852 DeFi 
trading protocols (which it calls decentralized exchanges).\27\ This 
data aggregator shows which website is used to access each DeFi trading 
protocol that it tracks and multiple DeFi trading protocols are 
accessed by the same website. Because information is not available on 
the number of trading front-end service providers, a conservative 
estimate of the number of trading front-end service providers can be 
made using the number of DeFi trading protocols. While this estimate 
does not reflect that one trading front-end service may provide access 
to multiple DeFi trading protocols, it also does not reflect unhosted 
wallet providers that provide trading front-end services which may also 
provide access to multiple DeFi trading protocols. Accordingly, based 
on the limited information available, the Treasury Department and the 
IRS have concluded that approximately 650 to 875 DeFi brokers, with a 
mid-point of approximately 765 DeFi brokers, will be impacted by these 
final regulations.
---------------------------------------------------------------------------

    \26\ DeFi Llama, https://defillama.com, (last visited November 
27, 2024).
    \27\ CoinGecko, Top Decentralized Exchanges Ranked by 24H 
Trading Volume, https://www.coingecko.com/en/exchanges/decentralized, (last visited November 27, 2024).
---------------------------------------------------------------------------

    The expected number of impacted issuers of information returns 
under these final regulations is between 650 and 875 estimated DeFi 
brokers (mid-point of 765). Small Business Administration regulations 
provide small business size standards by NAICS Industry. See 13 CFR 
121.201. The NAICS includes virtual currency exchange services in the 
NAICS code for Commodity Contracts Intermediation (52316). According to 
the Small Business Administration regulations, the maximum annual 
receipts for a concern and its affiliates to be considered small in 
this NAICS code is $41.5 million. Based on external reporting on 
decentralized exchange activity, approximately 10 of the 875 DeFi 
brokers identified as impacted issuers in the upper bound estimate 
exceed the $41.5 million threshold. This implies there could be up to 
865 impacted small business issuers under the Small Business 
Administration's small business size standards.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking was submitted to the Chief Counsel of the Office of Advocacy 
of the Small Business Administration for comment on its impact on small 
business, and no comments were received.
A. Need for and Objectives of the Rule
    Information reporting is essential to the integrity of the Federal 
tax system. The IRS estimated in its 2019 tax gap analysis that net 
misreporting as a percent of income for income with little to no third 
party information reporting is 55 percent. In comparison, misreporting 
for income with some information reporting, such as capital gains, is 
17 percent, and for income with substantial information reporting, such 
as dividend and interest income, is just five percent.
    Prior to TD 10000, many transactions involving digital assets were 
outside the scope of information reporting rules. Digital assets are 
treated as property for Federal income tax purposes. The regulations 
under section 6045 require brokers to file information returns for 
customers that sell certain types of property providing gross proceeds 
and, in some cases, adjusted basis. TD 10000 specifies that digital 
assets are a type of property for which information reporting is 
required by brokers. However, TD 10000 reserved on the rules for DeFi 
participants and thus did not include DeFi participants in the 
definition of broker required to file information returns for digital 
asset transactions.
    Information reporting by DeFi brokers under section 6045 will lead 
to higher levels of taxpayer compliance because the income earned by 
taxpayers engaging digital assets transactions without a custodial 
broker will be made more transparent to both the IRS and taxpayers. 
Clear information reporting rules that require DeFi brokers to report 
gross proceeds for taxpayers who engage in digital asset transactions 
will help the IRS identify taxpayers who have engaged in these 
transactions, and thereby help to reduce the overall tax gap. These 
final regulations are also expected to facilitate the preparation of 
tax returns (and reduce the number of inadvertent errors or intentional 
misstatements shown on those returns) by and for taxpayers who engage 
in digital asset transactions.
B. Affected Small Entities
    As discussed above, we anticipate a maximum of approximately 865 of 
the 875 (or 98.8 percent) impacted issuers in the upper bound estimate 
could be small businesses.
1. Impact of the Rules
    As previously stated in the Paperwork Reduction Act section of this 
preamble, the reporting of digital asset sales by DeFi brokers pursuant 
to Sec.  1.6045-1 is on Form 1099-DA.
    To estimate the impact of these final regulations on small DeFi 
brokers, the Treasury Department and the IRS first estimated the number 
of customers that will have transactions subject to these final 
regulations. To determine the number of customers that will have 
transactions subject to these final regulations, the Treasury 
Department and the IRS reviewed reports from several digital asset 
industry participants. While these reports indicate that there were 
over 196 million visits to the websites providing access to the DeFi 
trading protocols in the most recent month and $1.9 trillion in 24-hour 
trading volume for the most recent 24-hour period, these amounts do not 
reflect the number of customers that will be impacted by these 
regulations because a single customer may visit a website providing 
access to the DeFi trading protocols more than once in a month and may 
or may not engage in a trade each time they visit the website and the 
customer may also engage in different size transactions.\28\ 
Additionally neither the visits nor the trading volume were separately 
reported for U.S. and non-U.S. customers. In an attempt to narrow down 
this information to determine the number of customers that each DeFi 
protocol services, the Treasury Department and the IRS reviewed a 
recent analysis that found the North American cryptocurrency market is 
the largest cryptocurrency market, with an estimated $1.2 trillion in 
value received on-chain between July 2022 and June 2023, which 
represents 24.4% of global transaction activity.\29\ These on-chain 
transactions are likely correlated with DeFi transactions because many 
centralized brokers effect their customer transactions utilizing 
omnibus ledgers. Another analysis reported that the number of unique 
worldwide DeFi users reached a peak of 7.5 million in late

[[Page 106957]]

2021, whereas in April 2024, the total number of DeFi users was only 5 
million.\30\ Based on this information, the Treasury Department and the 
IRS have determined that best-available estimate of the minimum number 
of customers impacted by these regulations is 20% of the peak users in 
2024, which is an estimate of 1 million customers, and the maximum 
number of customers impacted by these regulations is 35% of the peak 
users in 2021, which is an estimated 2.625 million customers, with a 
mid-point of approximately 1,812,500 customers.\31\
---------------------------------------------------------------------------

    \28\ CoinGecko, Top Decentralized Exchanges Ranked by 24H 
Trading Volume, amounts referenced from the last date visited, 
https://www.coingecko.com/en/exchanges/decentralized (last visited 
November 27, 2024).
    \29\ Chainalysis Team, North America Leads World in Crypto Usage 
Despite Ongoing Regulatory Questions, While Stablecoin Activity 
Shifts Away from U.S. Services, Chainalysis (October 23, 2023), 
available at https://www.chainalysis.com/blog/north-america-cryptocurrency-adoption/ (last visited November 29, 2024).
    \30\ Ruby Layram, Eye-Opening DeFi Statistics & Facts (Updated 
for 2024), Bankless Times (August 1, 2024), available at https://www.banklesstimes.com/defi-statistics/ (last visited November 29, 
2024).
    \31\ While country-specific information is difficult to obtain, 
information on the North American cryptocurrency market would 
include U.S. users. Treasury and IRS use this information even 
though it is an over-estimate of U.S. users.
---------------------------------------------------------------------------

    Next, the Treasury Department and the IRS estimated the average 
time for a DeFi broker to complete the Form 1099-DA. These final 
regulations do not change the information required to be reported on 
the Form 1099-DA as provided in TD 10000. Therefore, the Treasury 
Department and the IRS have concluded that it is appropriate to use the 
average time to complete the Form 1099-DA estimate from TD 10000, which 
is between 7.5 minutes and 10.5 minutes, with a mid-point of 9 minutes 
(or 0.15 hours), for each customer. This estimate is based survey data 
collected from similar information return filers which include small 
businesses.
    Finally, the Treasury Department and the IRS estimated the average 
start-up costs per broker. The proposed regulations estimated that 
initial start-up costs would be between three and eight times annual 
costs. Several comments said that these costs were underestimated 
because many of the persons treated as brokers under the proposed 
regulations are newer companies with limited funding and resources. One 
comment said the multiple applied was too low and a five to ten times 
annual costs would be a more reasonable estimate given the complexity 
of the reporting regime and would more closely align with prior start-
up costs for similar reporting regimes. Consistent with TD 10000 and a 
continuing acknowledgment that it is difficult to estimate start-up 
costs, the Treasury Department and the IRS accept the comment to use a 
five to ten times annual cost multiplier to determine the estimate of 
these costs for DeFi brokers.
    In summary, the Treasury Department and the IRS estimate that 
approximately 865 of the 875 (or 98.8 percent) impacted issuers in the 
upper bound estimate could be small businesses. The Treasury Department 
and the IRS estimate that 1,812,500 customers will be impacted by these 
final regulations. As previously noted, the number of DeFi brokers is 
based on the number of DeFi trading protocols, rather than the number 
of trading front-end service providers because the number of trading 
front-end service providers is not readily available. It is not 
possible to know how many DeFi users engage in transactions with each 
DeFi trading protocol. Given the lack of information available, the 
Treasury Department and the IRS have assumed that each customer uses 
one DeFi trading protocol, which results in an estimate of 
approximately 2,400 customers per broker. A reasonable estimate for the 
average time to complete these forms for each customer is 9 minutes 
(0.15 hours). Therefore, the Treasury Department and the IRS estimate 
the average time burden per broker will be approximately 360 hours. 
Additionally, start-up costs are estimated to be between five and ten 
times annual costs. Given the expected per-DeFi broker annual burden of 
360 hours, the Treasury Department and the IRS estimate per-DeFi broker 
start-up burden between 1,800 to 3,600 in start-up costs to build 
processes to comply with the information reporting requirements.
    Although small DeFi brokers may engage third party tax reporting 
services to complete, file, and furnish information returns to avoid 
the start-up costs associated with building an internal information 
reporting system for sales of digital assets, it remains difficult to 
predict whether the economies of scale efficiencies of using these 
services will offset the somewhat more burdensome ongoing costs 
associated with using third party contractors.
2. Alternatives Considered for Small Businesses
    The Treasury Department and the IRS considered alternatives to 
these final regulations that would have created an exception to 
reporting, or a delayed applicability date, for small DeFi brokers but 
decided against such alternatives for several reasons. As discussed 
above, we anticipate that approximately 865 of the 875 (or 98.8 
percent) impacted issuers in the upper bound estimate could be small 
businesses. One purpose of these regulations is to eliminate the 
overall tax gap. Any exception or delay to the information reporting 
rules for small DeFi brokers, which may comprise the vast majority of 
impacted issuers, would reduce the effectiveness of these final 
regulations. In addition, such an exception or delay could have the 
unintended effect of incentivizing taxpayers to move their business to 
excepted small DeFi brokers, thus thwarting IRS efforts to identify 
taxpayers engaged in digital asset transactions. Additionally, because 
the information reported on statements furnished to customers will 
remind taxpayers who engage in DeFi transactions that the transactions 
are potentially taxable, thereby reducing the number of inadvertent 
errors or noncompliance on their Federal income tax returns, 
information reported by small DeFi brokers will be able to offer their 
customers the same amount of useful information as their larger DeFi 
competitors. Finally, to the extent investors in digital assets are 
themselves small businesses, these final regulations will also provide 
these businesses with the same reminders that the DeFi transactions are 
taxable.
3. Duplicate, Overlapping, or Relevant Federal Rules
    These final regulations do not overlap or conflict with any 
relevant Federal rules.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This rule does not include any Federal mandate that may 
result in expenditures by State, local, or Tribal governments, or by 
the private sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This final rule does not have 
federalism implications, does not impose substantial direct compliance 
costs on State and local governments, and does not preempt State law 
within the meaning of the Executive order.

[[Page 106958]]

VI. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as a major rule as defined by 5 U.S.C. 804(2).

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin and are available from the Superintendent of Documents, U.S. 
Government Publishing Office, Washington, DC 20402, or by visiting the 
IRS website at https://www.irs.gov.

Drafting Information

    The principal authors of these regulations are Roseann Cutrone and 
Jessica Chase, Office of the Associate Chief Counsel (Procedure and 
Administration). However, other personnel from the Treasury Department 
and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by revising 
the entry for Sec.  1.6045-1 to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.6045-1 also issued under 26 U.S.C. 6045(a).
* * * * *

0
Par. 2. Section 1.6045-0 is amended by:
0
1. Revising the entries for Sec.  1.6045-1(a)(21), (a)(21)(i) through 
(iii), and (a)(21)(iii)(A);
0
2. Adding entries for Sec.  1.6045-1(a)(21)(A)(iii)(1) and (2);
0
3. Revising the entry for Sec.  1.6045-1(a)(21)(iii)(B); and
0
4. Adding entries for Sec.  1.6045-1(a)(21)(iii)(C), (a)(21)(iii)(C)(1) 
and (2), and (a)(21)(iii)(D).
    The revisions and additions read as follows:


Sec.  1.6045-0  Table of contents.

* * * * *
Sec.  1.6045-1 Returns of information of brokers and barter 
exchanges.

    (a) * * *
    (21) Digital asset middleman.
    (i) Effectuating service.
    (ii) Position to know.
    (iii) Trading front-end service and other effectuating services.
    (A) Trading front-end service.
    (1) In general.
    (2) Location of digital assets received in an exchange and 
indirect transmission of orders.
    (B) Other effectuating services.
    (C) Excluded activities.
    (1) Validation services.
    (2) Licensing of software or selling of hardware.
    (D) Digital asset trading protocol.
* * * * *

0
Par. 3. Section 1.6045-1 is amended by:
0
a. Revising and republishing paragraph (a)(21);
0
b. Revising paragraphs (b)(2)(ix) and (x);
0
c. Adding paragraphs (b)(2)(xi) and (b)(24) and (25); and
0
d. Adding a sentence to the end of paragraph (q).
    The revisions and additions read as follows:


Sec.  1.6045-1  Returns of information of brokers and barter exchanges.

    (a) * * *
    (21) Digital asset middleman. The term digital asset middleman 
means any person who is responsible for providing an effectuating 
service as defined in paragraph (a)(21)(i) of this section with respect 
to a sale of digital assets.
    (i) Effectuating service. The term effectuating service means any 
service, with respect to a sale of digital assets, that is:
    (A) A trading front-end service described in paragraph 
(a)(21)(iii)(A) of this section wherein the nature of the service 
arrangement is such that the person providing that service ordinarily 
would know or be in a position to know within the meaning of paragraph 
(a)(21)(ii) of this section the nature of the transaction potentially 
giving rise to gross proceeds from the sale of digital assets; or
    (B) Any other service described in paragraph (a)(21)(iii)(B) of 
this section.
    (ii) Position to know. A person providing trading front-end 
services ordinarily would know or be in a position to know the nature 
of the transaction potentially giving rise to gross proceeds from a 
sale of digital assets if that person maintains control or sufficient 
influence over the trading front-end services to have the ability to 
determine whether and the extent to which the transfer of digital 
assets involved in a transaction gives rise to gross proceeds. A person 
providing trading front-end services will be considered to maintain 
control or sufficient influence over such services as referred to in 
this paragraph (a)(21)(ii) if that person has the ability to amend, 
update, or otherwise substantively affect the terms under which the 
services are provided or the manner in which the order described in 
paragraph (a)(21)(iii)(A) of this section is processed. Additionally, a 
person providing trading front-end services will be considered to 
maintain control or sufficient influence over such services as referred 
to in this paragraph (a)(21)(ii) if that person has the ability to 
collect the fees charged for those services from the transaction flow 
(including from the digital assets disposed of or the digital assets 
received by the customer in the sale), whether or not the person 
actually collects fees in this manner. A person providing trading 
front-end services also will be considered to maintain control or 
sufficient influence over such services as referred to in this 
paragraph (a)(21)(ii) if that person has the ability, in connection 
with processing the order described in paragraph (a)(21)(iii)(A) of 
this section, to add to the order a sequence of instructions to query 
the cryptographically secured distributed ledger to determine if the 
processed order is, in fact, executed or to use another method of 
confirmation based on information known to that person as a result of 
providing the trading front-end services. Except as provided by the 
Secretary, a contractual or other restriction not required by law that 
limits the ability of the person providing trading front-end services 
to amend, update, or otherwise substantively affect the terms under 
which the services are provided (including the manner in which any fees 
are collected) or the manner in which the order is processed will be 
disregarded for purposes of this paragraph (a)(21)(ii).
    (iii) Trading front-end service and other effectuating services--
(A) Trading front-end service--(1) In general. A trading front-end 
service means a service that, with respect to a sale of digital assets, 
receives a person's order to sell and processes that order for 
execution by providing user interface services, including graphic and 
voice user interface services, that are designed to:
    (i) Enable such person to input order details with respect to a 
transaction to be carried out or settled on a cryptographically secured 
distributed ledger (or any similar technology); and
    (ii) Transmit those order details so that the transaction can be 
carried out or settled on a cryptographically secured distributed 
ledger (or any similar technology), including by transmitting the order 
details to the person's wallet in such form that, if

[[Page 106959]]

authorized by the person, causes the order details to be transmitted to 
a distributed ledger network for interaction with a digital asset 
trading protocol as defined in paragraph (a)(21)(iii)(D) of this 
section.
    (2) Location of digital assets received in an exchange and indirect 
transmissions of orders. A service is a trading front-end service 
regardless of whether the digital assets received in the exchange are 
received in the wallet of the person providing the order details or in 
the wallet of another person pursuant to the first person's order 
details. The direct or indirect transmission to a distributed ledger 
network of order details that call upon or otherwise invoke the 
functions of automatically executing contracts that comprise a digital 
asset trading protocol is a transmission of order details to a 
distributed ledger network for interaction with a digital asset trading 
protocol.
    (B) Other effectuating services. An effectuating service also means 
any of the services described in paragraphs (a)(21)(iii)(B)(1) through 
(5) of this section.
    (1) The acceptance or processing of digital assets as payment for 
property of a type which when sold would constitute a sale under 
paragraph (a)(9)(i) of this section by a broker that is in the business 
of effecting sales of such property.
    (2) Any service performed by a real estate reporting person as 
defined in Sec.  1.6045-4(e) with respect to a real estate transaction 
in which digital assets are paid by the real estate buyer in full or 
partial consideration for the real estate, provided the real estate 
reporting person has actual knowledge or ordinarily would know that 
digital assets were used by the real estate buyer to make payment to 
the real estate seller. For purposes of this paragraph 
(a)(21)(iii)(B)(2), a real estate reporting person is considered to 
have actual knowledge that digital assets were used by the real estate 
buyer to make payment if the terms of the real estate contract provide 
for payment using digital assets.
    (3) The acceptance or processing of digital assets as payment for 
any service provided by a broker described in paragraph (a)(1) of this 
section determined without regard to any sales under paragraph 
(a)(9)(ii)(C) of this section that are effected by such broker.
    (4) Any payment service performed by a processor of digital asset 
payments described in paragraph (a)(22) of this section, provided the 
processor of digital asset payments has actual knowledge or ordinarily 
would know the nature of the transaction and the gross proceeds 
therefrom.
    (5) The acceptance of digital assets in return for cash, stored-
value cards, or different digital assets, to the extent provided by a 
physical electronic terminal or kiosk.
    (C) Excluded activities--(1) Validation services. Notwithstanding 
the definition of trading front-end services or other effectuating 
services in paragraphs (a)(21)(iii)(A) and (B) of this section, 
distributed ledger transaction validation services (whether through 
proof-of-work, proof-of-stake, or any other similar consensus 
mechanism), including those services necessary to complete the 
validation, are not effectuating services described in paragraph 
(a)(21)(i) of this section.
    (2) Licensing of software or selling of hardware. If a person 
licenses software or sells hardware that provides unhosted wallet 
services that include both trading front-end services with respect to 
some sales of digital assets and other services that are not trading 
front-end services or other effectuating services under paragraph 
(a)(21)(iii)(B) of this section with respect to other sales of digital 
assets, that person is providing effectuating services only with 
respect to the sales of digital assets that are carried out using the 
trading front-end services provided by the unhosted wallet software 
licensed or hardware sold.
    (D) Digital asset trading protocol. A digital asset trading 
protocol means a distributed ledger application consisting of computer 
software, including automatically executing contracts, that exchange 
one digital asset for another digital asset pursuant to instructions 
from a user.
* * * * *
    (b) * * *
    (2) * * *
    (ix) A person engaged in validating distributed ledger 
transactions, through proof-of-work, proof-of-stake, or any other 
similar consensus mechanism, including a person that provides services 
necessary to complete the validation, without providing other functions 
or services that are effectuating services under paragraph (a)(21)(i) 
of this section.
    (x) A person engaged in selling hardware or licensing of software, 
the sole function of which is to permit a person to control private 
keys which are used for accessing digital assets on a distributed 
ledger, without providing other functions or services that are 
effectuating services under paragraph (a)(21)(i) of this section.
    (xi) An operator of a digital asset trading protocol defined in 
paragraph (a)(21)(iii)(D) of this section that provides a distributed 
ledger application consisting of computer software, including 
automatically executing contracts, that exchange one digital asset for 
another digital asset pursuant to instructions from a user, without 
providing other functions or services that are effectuating services 
under paragraph (a)(21)(i) of this section.
* * * * *
    (24) Example 24: Effect, effectuating services, digital asset 
middleman, position to know, and customer--(i) Facts. As part of B's 
trade or business, B stands ready to provide customers with trading 
front-end services in return for a 1% transaction fee withheld either 
from digital assets transferred or digital assets received by its 
customers in the trade. B provides these trading front-end services to 
digital asset user C for the sale of 200 units of digital asset DE in 
exchange for 1,500 units of digital asset ST (sale 1) and withholds 2 
units of DE as a transaction fee. B also provides digital asset 
validation services for a distributed ledger network. B validates a 
transaction involving the sale of 20 units of digital asset DE for 150 
units of digital asset ST (sale 2). B does not provide any services 
described in paragraph (a)(21)(iii) of this section with respect to 
sale 2.
    (ii) Analysis with respect to sale 1. With respect to sale 1, B has 
the ability to collect fees charged for its trading front-end services 
from the transaction flow. Accordingly, B is in a position to know the 
nature of sale 1 under paragraph (a)(21)(ii) of this section because B 
maintains control or sufficient influence over the trading front-end 
services to have the ability to determine whether and the extent to 
which the transfer of digital assets involved in a transaction gives 
rise to gross proceeds. Because B provides a trading front-end service 
with respect to sale 1 and is in a position to know the nature of sale 
1 under paragraph (a)(21)(ii) of this section, B provides an 
effectuating service under paragraph (a)(21)(i)(A) of this section. 
Accordingly, B is a digital asset middleman under paragraph (a)(21) of 
this section with respect to sale 1. Additionally, B effects sale 1 for 
C under paragraph (a)(10)(i)(D) of this section, and C is B's customer 
under paragraph (a)(2)(i)(D) of this section.
    (iii) Analysis with respect to sale 2. Under paragraph 
(a)(21)(iii)(C) of this section, B's validation services with respect 
to sale 2 are not effectuating services. Accordingly, notwithstanding 
that B acts as a digital asset middleman

[[Page 106960]]

with respect to sale 1, B does not act as a digital asset middleman 
with respect to sale 2 or effect sale 2.
    (25) Example 25: Effect, effectuating services, position to know, 
digital asset middleman and customer--(i) Facts. Corporation S is 
engaged in the business of operating and maintaining a website that 
licenses S-brand unhosted wallets (S-Wallets). S-Wallets are accessible 
online, allow users to control private keys to digital asset addresses, 
and allow users to transfer (and receive) digital assets directly from 
(into) their S-Wallets. S also offers trading front-end services (S-
Trade) to each S-Wallet user. S charges S-Wallet users that dispose of 
digital assets held in their S-Wallets using the S-Trade service a 1% 
transaction fee that is withheld by S either from the digital assets 
transferred or the digital assets received by the user in the trade. S-
Wallet users can use the S-Wallet's private key control function and 
can transfer digital assets to and from their S-Wallets without using 
the S-Trade function. S-Wallet user K uses the S-Trade function within 
K's S-Wallet to trade 200 units of digital asset DE for 1,500 units of 
digital asset ST (sale 1). S withholds 2 units of DE as a transaction 
fee with respect to this trade. K also uses the S-Wallet to transfer 5 
units of DE directly to the digital asset address of another person's 
wallet in return for services provided by that other person (sale 2). S 
does not provide any other services described in paragraph (a)(21)(iii) 
of this section with respect to sale 2.
    (ii) Analysis with respect to sale 1. With respect to sale 1, S has 
the ability to collect fees charged for its trading front-end services 
from the transaction flow. Accordingly, S is in a position to know the 
nature of sale 1 under paragraph (a)(21)(ii) of this section because S 
maintains control or sufficient influence over the trading front-end 
services to have the ability to determine whether and the extent to 
which the transfer of digital assets involved in a transaction gives 
rise to gross proceeds. Because S provides a trading front-end service 
with respect to sale 1 and is in a position to know the nature of sale 
1 under paragraph (a)(21)(ii) of this section, S provides an 
effectuating service under paragraph (a)(21)(i)(A) of this section. 
Accordingly, S is a digital asset middleman under paragraph (a)(21) of 
this section with respect to sale 1. Finally, S effects sale 1 for K 
under paragraph (a)(10)(i)(D) of this section, and K is S's customer 
under paragraph (a)(2)(i)(D) of this section.
    (iii) Analysis with respect to sale 2. S's services with respect to 
sale 2 are not effectuating services under paragraph (a)(21)(i) of this 
section because these services are not described in paragraph 
(a)(21)(iii)(B) of this section and are not trading front-end services 
under paragraph (a)(21)(iii)(A) of this section. Accordingly, 
notwithstanding that S acts as a digital asset middleman with respect 
to sale 1, S does not act as a digital asset middleman with respect to 
sale 2 or effect sale 2.
* * * * *
    (q) * * * Paragraphs (a)(21), (b)(2)(ix) through (xi), and (b)(24) 
and (25) of this section apply to sales of digital assets on or after 
January 1, 2027. (For sales of digital assets before January 1, 2027, 
see 26 CFR 1.6045-1, as revised September 9, 2024.)
* * * * *

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: December 5, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-30496 Filed 12-27-24; 8:45 am]
BILLING CODE 4830-01-P`